UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2023~~March 31, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-31987

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)


Maryland		84-1477939
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

6565 Hillcrest Avenue
Dallas, TX		75205
(Address of principal executive offices)		(Zip Code)

(214) 855-2177

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HTH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

The number of shares of the registrant's common stock outstanding at ~~October 20, 2023~~April 19, 2024 was ~~65,169,821.~~65,266,915.

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2023~~MARCH 31, 2024

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item 1.1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	87
	Notes to Consolidated Financial Statements	98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4542

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8782

Item 4.	Controls and Procedures	9187


PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	9288

Item 1A.	Risk Factors	9288

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	9488

Item 5.	Other Information	9488

Item 6.	Exhibits	9489

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Assets
Cash and due from banks	$	1,513,747	$	1,579,512	$	1,710,066	$	1,858,700
Federal funds sold		3,650		650		650		650
Assets segregated for regulatory purposes		47,491		67,737		70,717		57,395
Securities purchased under agreements to resell		123,719		118,070		91,608		80,011
Securities:
Trading, at fair value		578,901		755,032		657,700		515,991
Available for sale, at fair value, net (amortized cost of $1,606,340 and $1,788,557, respectively)		1,456,238		1,658,766
Held to maturity, at amortized cost, net (fair value of $703,366 and $785,335, respectively)		825,079		875,532
Available for sale, at fair value, net (amortized cost of $1,594,167 and $1,621,747, respectively)						1,480,555		1,507,595
Held to maturity, at amortized cost, net (fair value of $702,843 and $731,858, respectively)						790,550		812,677
Equity, at fair value		264		200		315		321
		2,860,482		3,289,530		2,929,120		2,836,584

Loans held for sale		1,058,806		982,616		842,324		943,846
Loans held for investment, net of unearned income		8,204,052		8,092,673		8,062,693		8,079,745
Allowance for credit losses		(110,822)		(95,442)		(104,231)		(111,413)
Loans held for investment, net		8,093,230		7,997,231		7,958,462		7,968,332

Broker-dealer and clearing organization receivables		1,460,352		1,038,055		1,473,561		1,573,931
Premises and equipment, net		172,097		184,950		165,557		168,856
Operating lease right-of-use assets		93,057		102,443		95,343		88,580
Mortgage servicing rights		104,951		100,825		95,591		96,662
Other assets		588,751		518,899		501,244		517,545
Goodwill		267,447		267,447		267,447		267,447
Other intangible assets, net		9,078		11,317		7,943		8,457
Total assets	$	16,396,858	$	16,259,282	$	16,209,633	$	16,466,996

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	3,200,247	$	3,968,862	$	3,028,543	$	3,007,101
Interest-bearing		7,902,850		7,346,887		7,855,553		8,056,091
Total deposits		11,103,097		11,315,749		10,884,096		11,063,192

Broker-dealer and clearing organization payables		1,368,064		966,470		1,436,462		1,430,734
Short-term borrowings		882,999		970,056		892,574		900,038
Securities sold, not yet purchased, at fair value		51,527		53,023		60,562		34,872
Notes payable		347,020		346,654		347,273		347,145
Operating lease liabilities		114,334		126,759		114,518		109,002
Other liabilities		422,955		417,042		314,718		431,684
Total liabilities		14,289,996		14,195,753		14,050,203		14,316,667
Commitments and contingencies (see Notes 13 and 14)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 65,169,821 and 64,684,625 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		652		647
Common stock, $0.01 par value, 125,000,000 shares authorized; 65,266,915 and 65,153,092 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively						653		652
Additional paid-in capital		1,052,867		1,046,331		1,049,831		1,054,662
Accumulated other comprehensive loss		(145,083)		(133,531)		(119,606)		(121,505)
Retained earnings		1,171,250		1,123,636		1,201,013		1,189,222
Deferred compensation employee stock trust, net		340		481		115		228
Employee stock trust (15,711 and 22,566 shares, at cost, at September 30, 2023 and December 31, 2022, respectively)		(446)		(640)
Employee stock trust (5,018 and 10,290 shares, at cost, at March 31, 2024 and December 31, 2023, respectively)						(142)		(292)
Total Hilltop stockholders' equity		2,079,580		2,036,924		2,131,864		2,122,967
Noncontrolling interests		27,282		26,605		27,566		27,362
Total stockholders' equity		2,106,862		2,063,529		2,159,430		2,150,329
Total liabilities and stockholders' equity	$	16,396,858	$	16,259,282	$	16,209,633	$	16,466,996

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Interest income:
Loans, including fees	$	142,402	$	109,165	$	404,179	$	298,301	$	134,331	$	123,379
Securities borrowed		17,683		10,938		53,265		30,252		20,561		17,068
Securities:
Taxable		27,166		19,642		79,487		52,512		26,241		25,602
Tax-exempt		2,464		2,451		8,218		7,011		2,415		3,188
Other		27,040		14,276		76,459		23,066		26,066		22,190
Total interest income		216,755		156,472		621,608		411,142		209,614		191,427

Interest expense:
Deposits		64,290		12,525		154,840		22,174		69,144		35,824
Securities loaned		16,169		9,407		47,928		25,390		19,039		15,346
Short-term borrowings		14,212		5,550		44,361		10,615		11,588		12,444
Notes payable		4,026		3,907		11,852		12,154		3,590		3,853
Other		2,408		1,597		7,005		5,276		2,632		2,255
Total interest expense		101,105		32,986		265,986		75,609		105,993		69,722

Net interest income		115,650		123,486		355,622		335,533		103,621		121,705
Provision for (reversal of) credit losses		(40)		(780)		17,127		4,671		(2,871)		2,331
Net interest income after provision for (reversal of) credit losses		115,690		124,266		338,495		330,862		106,492		119,374

Noninterest income:
Net gains from sale of loans and other mortgage production income		47,262		57,998		135,763		266,435		40,197		39,966
Mortgage loan origination fees		41,478		39,960		111,695		114,400		26,438		28,777
Securities commissions and fees		28,044		34,076		88,873		105,979		35,557		31,223
Investment and securities advisory fees and commissions		39,662		35,031		98,546		96,738		30,226		26,848
Other		40,403		39,910		115,117		79,124		49,200		35,680
Total noninterest income		196,849		206,975		549,994		662,676		181,618		162,494

Noninterest expense:
Employees' compensation and benefits		173,195		200,450		517,920		605,796		165,830		167,817
Occupancy and equipment, net		21,912		25,041		67,802		74,038		21,912		22,865
Professional services		12,639		10,631		35,930		36,939		9,731		10,697
Other		52,271		52,616		155,812		156,858		52,550		49,091
Total noninterest expense		260,017		288,738		777,464		873,631		250,023		250,470

Income before income taxes		52,522		42,503		111,025		119,907		38,087		31,398
Income tax expense		13,211		9,249		24,008		27,191		8,565		3,630
Net income		39,311		33,254		87,017		92,716		29,522		27,768
Less: Net income attributable to noncontrolling interest		2,269		1,186		6,042		5,138		1,854		1,968
Income attributable to Hilltop	$	37,042	$	32,068	$	80,975	$	87,578	$	27,668	$	25,800

Earnings per common share:
Basic	$	0.57	$	0.50	$	1.25	$	1.21	$	0.42	$	0.40
Diluted	$	0.57	$	0.50	$	1.25	$	1.21	$	0.42	$	0.40

Weighted average share information:
Basic		65,106		64,552		65,011		72,400		65,200		64,901
Diluted		65,108		64,669		65,014		72,557		65,214		64,954

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Net income	$	39,311	$	33,254	$	87,017	$	92,716	$	29,522	$	27,768
Other comprehensive income (loss):
Change in fair value of cash flow hedges, net taxes of $(91), $2,188, $(87) and $5,099, respectively		(306)		21,749		(169)		58,158
Net unrealized gains (losses) on securities available-for-sale, net taxes of $(4,349), $(14,506), $(4,497) and $(34,747), respectively		(14,585)		(48,361)		(15,819)		(115,679)
Reclassification adjustment for gains (losses) included in net income, net taxes of $0, $0, $1 and $3, respectively		(2)		—		4		10
Adjustment for unrealized losses on securities transferred from available-for-sale to held-to-maturity, net taxes of $0, $0, $0 and $(17,033), respectively		—		—		—		(56,690)
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity, net taxes of $459, $609, $1,332 and $1,369, respectively		1,528		2,027		4,432		4,556
Comprehensive income (loss)		25,946		8,669		75,465		(16,929)
Change in fair value of cash flow hedges, net taxes of $94 and $(1,006), respectively										541		(3,249)
Net unrealized gains on securities available-for-sale, net taxes of $477 and $3,160, respectively										(86)		9,863
Reclassification adjustment for gains (losses) included in net income, net taxes of $34 and $0, respectively										114		—
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity, net taxes of $400 and $438, respectively										1,330		1,457
Comprehensive income										31,421		35,839
Less: comprehensive income attributable to noncontrolling interest		2,269		1,186		6,042		5,138		1,854		1,968

Comprehensive income (loss) applicable to Hilltop	$	23,677	$	7,483	$	69,423	$	(22,067)
Comprehensive income applicable to Hilltop									$	29,567	$	33,871

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

Accumulated



Deferred





Total




Additional

Other

Compensation

Employee

Hilltop

Total

Common Stock

Paid-in

Comprehensive

Retained

Employee Stock

Stock Trust

Stockholders’

Noncontrolling

Stockholders’

Shares

Amount

Capital

Loss

Earnings

Trust, Net

Shares

Amount

Equity

Interest

Equity
Balance, June 30, 2022
64,576

$
646

$
1,039,261

$
(95,279)

$
1,085,208

$
695

34

$
(954)

$
2,029,577

$
27,826

$
2,057,403
Net income
—

—

—

—

32,068

—

—

—

32,068

1,186

33,254
Other comprehensive loss
—

—

—

(24,585)

—

—

—

—

(24,585)

—

(24,585)
Stock-based compensation expense
—

—

4,334

—

—

—

—

—

4,334

—

4,334
Common stock issued to board members
6

—

146

—

—

—

—

—

146

—

146
Issuance of common stock related to share-based awards, net
9

—

(136)

—

—

—

—

—

(136)

—

(136)
Dividends on common stock ($0.15 per share)
—

—

—

—

(9,690)

—

—

—

(9,690)

—

(9,690)
Deferred compensation plan
—

—

—

—

—

(216)

(11)

313

97

—

97
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(1,940)

(1,940)
Balance, September 30, 2022
64,591

$
646

$
1,043,605

$
(119,864)

$
1,107,586

$
479

23

$
(641)

$
2,031,811

$
27,072

$
2,058,883

Balance, June 30, 2023
65,071

$
651

$
1,050,191

$
(131,718)

$
1,144,624

$
450

21

$
(599)

$
2,063,599

$
26,655

$
2,090,254
Net income
—

—

—

—

37,042

—

—

—

37,042

2,269

39,311
Other comprehensive loss
—

—

—

(13,365)

—

—

—

—

(13,365)

—

(13,365)
Stock-based compensation expense
—

—

2,936

—

—

—

—

—

2,936

—

2,936
Common stock issued to board members
4

—

128

—

—

—

—

—

128

—

128
Issuance of common stock related to share-based awards, net
95

1

(388)

—

—

—

—

—

(387)

—

(387)
Dividends on common stock ($0.16 per share)
—

—

—

—

(10,416)

—

—

—

(10,416)

—

(10,416)
Deferred compensation plan
—

—

—

—

—

(110)

(5)

153

43

—

43
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(1,642)

(1,642)
Balance, September 30, 2023
65,170

$
652

$
1,052,867

$
(145,083)

$
1,171,250

$
340

16

$
(446)

$
2,079,580

$
27,282

$
2,106,862


						Accumulated				Deferred					Total
				Additional		Other				Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Loss		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2022	64,685	$	647	$	1,046,331	$	(133,531)	$	1,123,636	$	481	23	$	(640)	$	2,036,924	$	26,605	$	2,063,529
Net income	—		—		—		—		25,800		—	—		—		25,800		1,968		27,768
Other comprehensive income	—		—		—		8,070		—		—	—		—		8,070		—		8,070
Stock-based compensation expense	—		—		4,047		—		—		—	—		—		4,047		—		4,047
Common stock issued to board members	5		—		150		—		—		—	—		—		150		—		150
Issuance of common stock related to share-based awards, net	478		5		(3,437)		—		—		—	—		—		(3,432)		—		(3,432)
Repurchases of common stock	(145)		(2)		(2,317)		—		(2,184)		—	—		—		(4,503)		—		(4,503)
Dividends on common stock ($0.16 per share)	—		—		—		—		(10,351)		—	—		—		(10,351)		—		(10,351)
Deferred compensation plan	—		—		—		—		—		(35)	(2)		41		6		—		6
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(1,486)		(1,486)
Balance, March 31, 2023	65,023	$	650	$	1,044,774	$	(125,461)	$	1,136,901	$	446	21	$	(599)	$	2,056,711	$	27,087	$	2,083,798

Balance, December 31, 2023	65,153	$	652	$	1,054,662	$	(121,505)	$	1,189,222	$	228	10	$	(292)	$	2,122,967	$	27,362	$	2,150,329
Net income	—		—		—		—		27,668		—	—		—		27,668		1,854		29,522
Other comprehensive income	—		—		—		1,899		—		—	—		—		1,899		—		1,899
Stock-based compensation expense	—		—		2,940		—		—		—	—		—		2,940		—		2,940
Common stock issued to board members	4		—		121		—		—		—	—		—		121		—		121
Issuance of common stock related to share-based awards, net	430		4		(2,755)		—		—		—	—		—		(2,751)		—		(2,751)
Repurchases of common stock	(320)		(3)		(5,137)		—		(4,801)		—	—		—		(9,941)		—		(9,941)
Dividends on common stock ($0.17 per share)	—		—		—		—		(11,076)		—	—		—		(11,076)		—		(11,076)
Deferred compensation plan	—		—		—		—		—		(113)	(5)		150		37		—		37
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(1,650)		(1,650)
Balance, March 31, 2024	65,267	$	653	$	1,049,831	$	(119,606)	$	1,201,013	$	115	5	$	(142)	$	2,131,864	$	27,566	$	2,159,430

See accompanying notes.

Table of Contents

~~HILLTOP HOLDINGS INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)~~

~~(in thousands)~~

~~(Unaudited)~~

Accumulated



Deferred





Total




Additional

Other

Compensation

Employee

Hilltop

Total

Common Stock

Paid-in

Comprehensive

Retained

Employee Stock

Stock Trust

Stockholders’

Noncontrolling

Stockholders’

Shares

Amount

Capital

Loss

Earnings

Trust, Net

Shares

Amount

Equity

Interest

Equity
Balance, December 31, 2021
78,965

$
790

$
1,274,446

$
(10,219)

$
1,257,014

$
752

6

$
(115)

$
2,522,668

$
26,535

$
2,549,203
Net income
—

—

—

—

87,578

—

—

—

87,578

5,138

92,716
Other comprehensive loss
—

—

—

(109,645)

—

—

—

—

(109,645)

—

(109,645)
Stock-based compensation expense
—

—

11,553

—

—

—

—

—

11,553

—

11,553
Common stock issued to board members
17

—

451

—

—

—

—

—

451

—

451
Issuance of common stock related to share-based awards, net
478

4

(4,206)

—

—

—

—

—

(4,202)

—

(4,202)
Repurchases of common stock
(14,869)

(148)

(238,639)

—

(203,549)

—

—

—

(442,336)

—

(442,336)
Dividends on common stock ($0.45 per share)
—

—

—

—

(33,457)

—

—

—

(33,457)

—

(33,457)
Deferred compensation plan
—

—

—

—

—

(273)

17

(526)

(799)

—

(799)
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(4,601)

(4,601)
Balance, September 30, 2022
64,591

$
646

$
1,043,605
��
$
(119,864)

$
1,107,586

$
479

23

$
(641)

$
2,031,811

$
27,072

$
2,058,883

Balance, December 31, 2022
64,685

$
647

$
1,046,331

$
(133,531)

$
1,123,636

$
481

23

$
(640)

$
2,036,924

$
26,605

$
2,063,529
Net income
—

—

—

—

80,975

—

—

—

80,975

6,042

87,017
Other comprehensive loss
—

—

—

(11,552)

—

—

—

—

(11,552)

—

(11,552)
Stock-based compensation expense
—

—

12,967

—

—

—

—

—

12,967

—

12,967
Common stock issued to board members
14

—

428

—

—

—

—

—

428

—

428
Issuance of common stock related to share-based awards, net
616

7

(4,542)

—

—

—

—

—

(4,535)

—

(4,535)
Repurchases of common stock
(145)

(2)

(2,317)

—

(2,184)

—

—

—

(4,503)

—

(4,503)
Dividends on common stock ($0.48 per share)
—

—

—

—

(31,177)

—

—

—

(31,177)

—

(31,177)
Deferred compensation plan
—

—

—

—

—

(141)

(7)

194

53

—

53
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(5,365)

(5,365)
Balance, September 30, 2023
65,170

$
652

$
1,052,867

$
(145,083)

$
1,171,250

$
340

16

$
(446)

$
2,079,580

$
27,282

$
2,106,862

~~See accompanying notes~~.

~~Table of Contents~~

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Nine Months Ended September 30,


2023

2022

Operating Activities

Net income

$
87,017

$
92,716

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

17,127

4,671

Depreciation, amortization and accretion, net

15,267

20,207

Deferred income taxes

5,268

2,258

Other, net

12,531

11,814

Net change in securities purchased under agreements to resell

(5,649)

(27,103)

Net change in trading securities

176,131

6,134

Net change in broker-dealer and clearing organization receivables

(348,318)

748,584

Net change in other assets

(40,165)

(52,021)

Net change in broker-dealer and clearing organization payables

360,433

(470,426)

Net change in other liabilities

(13,295)

66,479

Net change in securities sold, not yet purchased

(1,496)

2,929

Proceeds from sale of mortgage servicing rights asset

19,055

1,876

Change in valuation of mortgage servicing rights asset

678

(23,575)

Net gains from sales of loans

(135,763)

(266,435)

Loans originated for sale

(7,297,473)

(11,706,056)

Proceeds from loans sold

7,328,562

12,823,759

Net cash provided by operating activities

179,910

1,235,811

Investing Activities

Proceeds from maturities and principal reductions of securities held to maturity

55,006

78,144

Proceeds from sales, maturities and principal reductions of securities available for sale

204,903

259,774

Purchases of securities held to maturity

—

(11,432)

Purchases of securities available for sale

(31,567)

(625,522)

Purchases of equity securities

—

(30)

Net change in loans held for investment

(184,341)

(391,040)

Purchases of premises and equipment and other assets

(6,090)

(7,335)

Proceeds from sales of premises and equipment and other real estate owned

3,431

1,808

Net cash received from (paid to) Federal Home Loan Bank and Federal Reserve Bank stock

689

(175)

Net cash provided by (used in) investing activities

42,031

(695,808)

Financing Activities

Net change in deposits

(171,491)

(1,296,781)

Net change in short-term borrowings

(87,251)

82,178

Proceeds from notes payable

490,151

638,498

Payments on notes payable

(490,151)

(636,394)

Payments to repurchase common stock

(4,503)

(442,336)

Dividends paid on common stock

(31,177)

(33,457)

Net cash distributed to noncontrolling interest

(5,365)

(4,601)

Other, net

(5,165)

(4,768)

Net cash used in financing activities

(304,952)

(1,697,661)

Net change in cash, cash equivalents and restricted cash

(83,011)

(1,157,658)

Cash, cash equivalents and restricted cash, beginning of period

1,647,899

3,045,263

Cash, cash equivalents and restricted cash, end of period

$
1,564,888

$
1,887,605

Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets

Cash and due from banks

$
1,513,747

$
1,777,584

Federal funds sold

3,650

663

Assets segregated for regulatory purposes

47,491

109,358

Total cash, cash equivalents and restricted cash

$
1,564,888

$
1,887,605

Supplemental Disclosures of Cash Flow Information

Cash paid for interest

$
252,409

$
69,681

Cash paid for income taxes, net of refunds

$
14,076

$
14,956

Supplemental Schedule of Non-Cash Activities

Conversion of loans to other real estate owned

$
5,168

$
326

Additions to mortgage servicing rights

$
23,859

$
47,850


	Three Months Ended March 31,
	2024		2023
Operating Activities
Net income	$	29,522	$	27,768
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for (reversal of) credit losses		(2,871)		2,331
Depreciation, amortization and accretion, net		5,026		5,843
Equity in undistributed earnings of merchant banking subsidiaries		(2,125)		1,792
Deferred income taxes		1,871		2,923
Other, net		145		4,150
Net change in securities purchased under agreements to resell		(11,597)		(26,131)
Net change in trading securities		(141,709)		62,124
Net change in broker-dealer and clearing organization receivables		111,867		(452,555)
Net change in other assets		5,401		28,858
Net change in broker-dealer and clearing organization payables		15,861		406,392
Net change in other liabilities		(97,251)		(98,945)
Net change in securities sold, not yet purchased		25,690		(1,526)
Change in valuation of mortgage servicing rights asset		4,383		10,721
Net gains from sales of loans		(40,197)		(39,966)
Loans originated for sale		(1,951,478)		(2,051,075)
Proceeds from loans sold		2,118,309		2,008,839
Net cash provided by (used in) operating activities		70,847		(108,457)
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		23,513		14,729
Proceeds from sales, maturities and principal reductions of securities available for sale		46,538		56,549
Proceeds from sales, maturities and principal reductions of equity securities		1,333		—
Purchases of securities available for sale		(24,039)		(19,997)
Net change in loans held for investment		(31,472)		(170,546)
Purchases of premises and equipment and other assets		(2,443)		(1,139)
Proceeds from sales of premises and equipment and other real estate owned		2,121		1,450
Net cash paid to Federal Home Loan Bank and Federal Reserve Bank stock		(22)		(23,310)
Net cash provided by (used in) investing activities		15,529		(142,264)
Financing Activities
Net change in deposits		(189,229)		(208,147)
Net change in short-term borrowings		(6,811)		602,328
Proceeds from notes payable		—		146,110
Payments on notes payable		—		(116,474)
Payments to repurchase common stock		(9,941)		(4,503)
Dividends paid on common stock		(11,076)		(10,351)
Net cash distributed to noncontrolling interest		(1,650)		(1,486)
Other, net		(2,981)		(3,632)
Net cash provided by (used in) financing activities		(221,688)		403,845

Net change in cash, cash equivalents and restricted cash		(135,312)		153,124
Cash, cash equivalents and restricted cash, beginning of period		1,916,745		1,647,899
Cash, cash equivalents and restricted cash, end of period	$	1,781,433	$	1,801,023

Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks	$	1,710,066	$	1,764,081
Federal funds sold		650		743
Assets segregated for regulatory purposes		70,717		36,199
Total cash, cash equivalents and restricted cash	$	1,781,433	$	1,801,023
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	109,119	$	63,682
Cash paid for income taxes, net of refunds	$	369	$	(49)
Supplemental Schedule of Non-Cash Activities
Conversion of loans to other real estate owned	$	2,766	$	2,391
Transfer of loans held for investment to loans held for sale	$	31,551	$	—
Additions to mortgage servicing rights	$	3,312	$	13,210

See accompanying notes.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer and mortgage origination subsidiaries.

The Company, headquartered in Dallas, Texas, provides its products and services through two primary business units, PlainsCapital Corporation (“PCC”) and Hilltop Securities Holdings LLC (“Securities Holdings”). PCC is a financial holding company that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2022~~2023 (“~~2022~~2023 Form 10-K”). Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for credit losses, the fair values of financial instruments, the mortgage loan indemnification liability, and the potential impairment of goodwill and identifiable intangible assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.

Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the membership interest in Hilltop Opportunity Partners LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds a controlling ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).

Hilltop has a 100% membership interest in Securities Holdings, which operates through its ~~wholly owned~~wholly-owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Momentum Independent Network Inc. (“Momentum Independent Network” and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and Hilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the SEC and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

that is also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.

In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC (“HTH Project LLC”) and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza investment discussed in detail in Note 1817 to the consolidated financial statements included in the Company’s ~~2022~~2023 Form 10-K and are collectively referred to as the “Hilltop Plaza Entities.”

The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the ASC.

~~Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation.~~ In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.

Significant accounting policies are detailed in Note 1 to the consolidated financial statements included in the Company’s ~~2022~~2023 Form 10-K.

2. Recently Issued Accounting Standards

~~Accounting Standards Adopted During 2023~~

In March 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-02 to eliminate the recognition and measurement guidance on troubled debt restructurings (“TDRs”) for creditors, and require enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The amendments are effective in periods beginning after December 15, 2022 using either a prospective or modified retrospective transition. The Company adopted the provisions of ASU 2022-02 as of January 1, 2023 on a prospective basis. The adoption of this amendment did not have a material impact on the Company’s future consolidated financial statements.

In September 2022, the FASB issued ASU 2022-04 to require entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of such programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations and a description of where in the financial statements outstanding amounts are present. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The amendments are effective in periods beginning after December 15, 2022, except that the amendments to disclose a rollforward of obligations outstanding will be effective beginning after December 15, 2023. The Company adopted the provisions as of January 1, 2023. The adoption of this amendment did not have a material impact on the Company’s future consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01 to require entities to classify and account for leases with related parties on the basis of legally enforceable terms and conditions of the arrangement. The amendments are effective in periods beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2023-01 as of January 1, 2023 on a prospective basis for new and existing leasehold improvements. The adoption of this amendment did not have a material impact on the Company’s future consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted

In August 2023, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) 2023-05 to require joint ventures to initially measure all contributions received and liabilities assumed upon its formation at fair value. The guidance is applicable to joint venture entities with a formation date on or after

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

January 1, ~~2025.~~2025, with early adoption permitted. The Company ~~is currently evaluating~~does not expect the ~~provisions~~future adoption of ~~the amendments and the~~this amendment to have a material impact on its future consolidated statements.

In October 2023, the FASB issued ASU 2023-06 to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC's regulations. The amendments will be effective on the date the SEC removes related disclosure requirements from Regulation S-X or Regulation S-K. If by June 30, 2027, the SEC has not removed the applicable disclosure requirements, the pending amendments will not become effective. Early adoption is prohibited. The Company does not expect the future adoption of this amendment to have a material impact on its consolidated financial statements since the Company is currently subject to the SEC’s disclosure and presentation requirements under Regulation S-X and Regulation S-K.

In November 2023, the FASB issued ASU 2023-07 to enhance disclosures of significant expense and segment profitability categories and amounts for each of the Company’s reportable business segments. The amendments are effective in annual periods beginning after December 15, 2023 and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated statements.

In December 2023, the FASB issued ASU 2023-09 to improve disclosures and presentation requirements to the transparency of the income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments are effective in annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated statements.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

In March 2024, the FASB issued ASU 2024-01 to clarify how an entity should determine whether a profits interest or similar award should be accounted for as a share-based payment arrangement or similar to a cash bonus or profit-sharing arrangement. The amendments are effective in annual periods beginning after December 15, 2024, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the new guidance and the impact on its future consolidated statements.

3. Fair Value Measurements

Fair Value Measurements and Disclosures

The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the “Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.

●

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

●

Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, prepayment speeds, default rates, credit risks and loss severities), and inputs that are derived from or corroborated by market data, among others.

●

Level 3 Inputs: Unobservable inputs that reflect an entity’s own estimates about the assumptions that market participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques, among others.

Fair Value Option

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained mortgage servicing rights (“MSR”) asset at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was ~~$933.5~~$684.1 million and ~~$855.7~~$822.2 million, respectively, and the unpaid principal balance of those loans was ~~$933.6~~$675.5 million and ~~$850.3~~$802.3 million, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 ~~inputs, as further described below.~~inputs. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit price method.

1110

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

~~investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit price method.~~

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).


	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
September 30, 2023	Inputs		Inputs		Inputs		Fair Value
March 31, 2024									Inputs		Inputs		Inputs		Fair Value
Trading securities	$	10,636	$	568,265	$	—	$	578,901	$	6,504	$	651,196	$	—	$	657,700
Available for sale securities		—		1,444,238		12,000		1,456,238		—		1,459,741		20,814		1,480,555
Equity securities		264		—		—		264		315		—		—		315
Loans held for sale		—		897,285		36,198		933,483		—		663,832		51,795		715,627
Loans held for investment		—		—		9,999		9,999		—		—		11,211		11,211
Derivative assets		—		117,072		—		117,072		—		74,413		820		75,233
MSR asset		—		—		104,951		104,951		—		—		95,591		95,591
Equity investments										—		—		19,540		19,540
Securities sold, not yet purchased		28,975		22,552		—		51,527		56,070		4,492		—		60,562
Derivative liabilities		—		28,446		—		28,446		—		8,313		—		8,313


	Level 1		Level 2		Level 3			Total	Level 1		Level 2		Level 3			Total
December 31, 2022	Inputs		Inputs		Inputs			Fair Value
December 31, 2023									Inputs		Inputs		Inputs			Fair Value
Trading securities	$	15,456	$	739,576	$	—	$	755,032	$	8,929	$	507,062	$	—	$	515,991
Available for sale securities		—		1,658,766		—		1,658,766		—		1,483,177		24,418		1,507,595
Equity securities		200		—		—		200		321		—		—		321
Loans held for sale		—		814,990		40,707		855,697		—		784,158		38,036		822,194
Loans held for investment		—		—		9,181		9,181		—		—		10,858		10,858
Derivative assets		—		88,977		—		88,977		—		76,778		820		77,598
MSR asset		—		—		100,825		100,825		—		—		96,662		96,662
Equity investments										—		—		19,540		19,540
Securities sold, not yet purchased		25,506		27,517		—		53,023		14,027		20,845		—		34,872
Derivative liabilities		—		11,405		—		11,405		—		27,106		—		27,106

The following tables include a rollforward for those material financial instruments measured at fair value using Level 3 inputs (in thousands).


									Total Gains or Losses
									(Realized or Unrealized)
	Balance,						Transfers				Included in Other
	Beginning of		Purchases/		Sales/		to (from)		Included in		Comprehensive		Balance,
	Period		Additions		Reductions		Level 3		Net Income		Income (Loss)		End of Period
Three months ended March 31, 2024
Available for sale securities	$	24,418	$	—	$	(4,702)	$	—	$	635	$	463	$	20,814
Loans held for sale		38,036		25,342		(6,076)		—		(5,507)		—		51,795
Loans held for investment		10,858		—		—		—		353		—		11,211
Derivative assets		820		—		—		—		—		—		820
MSR asset		96,662		3,312		—		—		(4,383)		—		95,591
Equity investment		19,540		—		—		—		—		—		19,540
Total	$	190,334	$	28,654	$	(10,778)	$	—	$	(8,902)	$	463	$	199,771

Three months ended March 31, 2023
Loans held for sale	$	40,707	$	16,796	$	(23,454)	$	(446)	$	390	$	—	$	33,993
Loans held for investment		9,181		—		—		—		256		—		9,437
MSR asset		100,825		13,210		—		—		(10,721)		—		103,314
Total	$	150,713	$	30,006	$	(23,454)	$	(446)	$	(10,075)	$	—	$	146,744

All net realized and unrealized gains (losses) in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at March 31, 2024.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

For material Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows.


					Range (Weighted-Average)
Financial instrument	Fair Value		Valuation Technique	Unobservable Inputs	March 31, 2024							December 31, 2023
Available for sale securities	$	7,893	Discounted cash flow	Discount rate	14.50	-	15.25	%				14.25	-	15.50	%
		12,921	Recent transaction	Recent transaction

Loans held for sale		51,795	Market comparable	Projected price	78	-	91	%	(	90	%)	78	-	92	%	(	90	%)

Loans held for investment		11,211	Discounted cash flow	Discount rate	9.00	-	9.50	%							10.00		%

Derivative assets		820	Discounted cash flow	Discount rate				15.00		%					15.00		%

MSR asset		95,591	Discounted cash flow	Constant prepayment rate				8.53		%					8.65		%
				Discount rate				13.02		%					11.67		%

Equity investments		19,540	Recent transaction	Recent transaction

The fair value of certain available for sale securities and loans held for investment by the Company’s merchant bank subsidiary are measured, under the provisions of the Fair Value Option, using the income approach with Level 3 inputs. The fair value of such financial instruments are based upon estimates of expected cash flows using unobservable inputs, including credit spreads derived from comparable securities and benchmark credit curves, and management’s knowledge of underlying collateral.

The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.

The fair value of certain derivatives by the Company’s merchant bank subsidiary are measured using Level 3 inputs based upon estimates of expected cash flows using unobservable inputs, including management’s knowledge of underlying collateral.

The MSR asset is reported at fair value, under the provisions of the Fair Value Option, using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.

The Company has elected to measure certain equity investments by the Company’s merchant bank subsidiary under the provisions of the Fair Value Option using Level 3 inputs to mitigate volatility in reported earnings changes in fair value and better align with merchant bank investment strategy. Changes in fair value are reported within other noninterest income in the accompanying consolidated statements of operations.

The Company had no transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes in the observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting period in which they occur.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following table presents those changes in fair value of material instruments recognized in the consolidated statements of operations that are accounted for under the Fair Value Option (in thousands).


	Three Months Ended March 31, 2024						Three Months Ended March 31, 2023
			Other		Total				Other		Total
	Net		Noninterest		Changes in		Net		Noninterest		Changes in
	Gains (Losses)		Income		Fair Value		Gains (Losses)		Income		Fair Value
Loans held for sale	$	(11,316)	$	—	$	(11,316)	$	10,134	$	—	$	10,134
Loans held for investment		94		—		94		—		—		—
MSR asset		(4,383)		—		(4,383)		(10,721)		—		(10,721)

Financial Assets and Liabilities Not Measured at Fair Value on Recurring or Non-Recurring Basis

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 3 to the consolidated financial statements included in the Company’s 2023 Form 10-K.

The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
March 31, 2024	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,710,716	$	1,710,716	$	—	$	—	$	1,710,716
Assets segregated for regulatory purposes		70,717		70,717		—		—		70,717
Securities purchased under agreements to resell		91,608		—		91,608		—		91,608
Held to maturity securities		790,550		—		702,843		—		702,843
Loans held for sale		126,697		—		93,090		34,615		127,705
Loans held for investment, net		7,947,250		—		332,675		7,693,786		8,026,461
Broker-dealer and clearing organization receivables		1,473,561		—		1,473,561		—		1,473,561
Other assets		75,388		—		75,388		—		75,388

Financial liabilities:
Deposits		10,884,096		—		10,873,333		—		10,873,333
Broker-dealer and clearing organization payables		1,436,462		—		1,436,462		—		1,436,462
Short-term borrowings		892,574		—		892,574		—		892,574
Debt		347,273		—		322,845		—		322,845
Other liabilities		21,807		—		21,807		—		21,807

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Notes to Consolidated Financial Statements (continued)

(Unaudited)


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2023	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,859,350	$	1,859,350	$	—	$	—	$	1,859,350
Assets segregated for regulatory purposes		57,395		57,395		—		—		57,395
Securities purchased under agreements to resell		80,011		—		80,011		—		80,011
Held to maturity securities		812,677		—		731,858		—		731,858
Loans held for sale		121,652		—		99,358		22,882		122,240
Loans held for investment, net		7,957,474		—		344,172		7,696,393		8,040,565
Broker-dealer and clearing organization receivables		1,573,931		—		1,573,931		—		1,573,931
Other assets		74,613		—		74,613		—		74,613

Financial liabilities:
Deposits		11,063,192		—		11,045,957		—		11,045,957
Broker-dealer and clearing organization payables		1,430,734		—		1,430,734		—		1,430,734
Short-term borrowings		900,038		—		900,038		—		900,038
Debt		347,145		—		319,505		—		319,505
Other liabilities		24,280		—		24,280		—		24,280

The Company held equity investments other than securities of $39.0 million and $59.2 million at March 31, 2024 and December 31, 2023, respectively, which are included within other assets in the consolidated balance sheets. Of the $39.0 million of such equity investments held at March 31, 2024, $6.6 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).


	Three Months Ended March 31,
	2024		2023
Balance, beginning of period	$	6,608	$	27,264
Upward adjustments		—		243
Impairments and downward adjustments		—		(5,000)
Balance, end of period	$	6,608	$	22,507

4. Securities

The fair value of trading securities is summarized as follows (in thousands).


	March 31,		December 31,
	2024		2023
U.S. Treasury securities	$	1,247	$	3,736
U.S. government agencies:
Bonds		14,513		12,867
Residential mortgage-backed securities		155,355		124,768
Collateralized mortgage obligations		103,085		86,281
Other		—		13,079
Corporate debt securities		56,252		37,569
States and political subdivisions		260,700		180,890
Private-label securitized product		56,084		47,768
Other		10,464		9,033
Totals	$	657,700	$	515,991

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $60.6 million and $34.9 million at March 31, 2024 and December 31, 2023, respectively.

The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).


	Available for Sale
	Amortized		Unrealized		Unrealized
March 31, 2024	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	4,987	$	—	$	(379)	$	4,608
U.S. government agencies:
Bonds		160,657		216		(759)		160,114
Residential mortgage-backed securities		389,134		64		(41,562)		347,636
Commercial mortgage-backed securities		196,627		229		(6,767)		190,089
Collateralized mortgage obligations		783,966		232		(60,824)		723,374
Corporate debt securities		21,851		—		(1,037)		20,814
States and political subdivisions		36,945		35		(3,060)		33,920
Totals	$	1,594,167	$	776	$	(114,388)	$	1,480,555


	Available for Sale
	Amortized		Unrealized		Unrealized
December 31, 2023	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	4,985	$	—	$	(368)	$	4,617
U.S. government agencies:
Bonds		166,617		360		(811)		166,166
Residential mortgage-backed securities		389,160		25		(39,315)		349,870
Commercial mortgage-backed securities		200,236		468		(8,958)		191,746
Collateralized mortgage obligations		797,876		291		(61,686)		736,481
Corporate debt securities		25,919		—		(1,501)		24,418
States and political subdivisions		36,954		39		(2,696)		34,297
Totals	$	1,621,747	$	1,183	$	(115,335)	$	1,507,595


	Held to Maturity
	Amortized		Unrealized		Unrealized
March 31, 2024	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	273,005	$	—	$	(29,334)	$	243,671
Commercial mortgage-backed securities		162,273		—		(13,422)		148,851
Collateralized mortgage obligations		277,859		—		(38,969)		238,890
States and political subdivisions		77,413		72		(6,054)		71,431
Totals	$	790,550	$	72	$	(87,779)	$	702,843


	Held to Maturity
	Amortized		Unrealized		Unrealized
December 31, 2023	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	278,172	$	—	$	(25,765)	$	252,407
Commercial mortgage-backed securities		172,879		—		(12,670)		160,209
Collateralized mortgage obligations		284,208		—		(37,189)		247,019
States and political subdivisions		77,418		149		(5,344)		72,223
Totals	$	812,677	$	149	$	(80,968)	$	731,858

Additionally, the Company had unrealized net gains of $0.3 million and $0.3 million at March 31, 2024 and December 31, 2023, respectively, from equity securities with fair values of $0.3 million and $0.3 million held at March 31, 2024 and

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

December 31, 2023, respectively. The Company recognized nominal net gains and losses during the three months ended March 31, 2024 and 2023, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three months ended March 31, 2024 and 2023, net gains and losses recognized from equity securities sold were nominal.

Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).


	March 31, 2024					December 31, 2023
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Available for Sale
U.S. treasury securities:
Unrealized loss for less than twelve months	—	$	—	$	—	—	$	—	$	—
Unrealized loss for twelve months or longer	1		4,608		379	1		4,617		368
	1		4,608		379	1		4,617		368
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months	4		28,891		150	4		28,988		103
Unrealized loss for twelve months or longer	20		107,789		609	20		112,502		708
	24		136,680		759	24		141,490		811
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	14		16,213		813	14		8,989		616
Unrealized loss for twelve months or longer	109		322,481		40,749	109		338,769		38,699
	123		338,694		41,562	123		347,758		39,315
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	3		15,040		411	2		10,413		282
Unrealized loss for twelve months or longer	18		186,537		6,356	18		162,470		8,676
	21		201,577		6,767	20		172,883		8,958
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	3		18,327		273	2		11,560		22
Unrealized loss for twelve months or longer	136		682,738		60,551	138		709,571		61,665
	139		701,065		60,824	140		721,131		61,687
Corporate debt securities:
Unrealized loss for less than twelve months	1		8,930		1,037	2		13,483		1,501
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	1		8,930		1,037	2		13,483		1,501
States and political subdivisions:
Unrealized loss for less than twelve months	10		6,957		105	10		7,023		55
Unrealized loss for twelve months or longer	50		20,550		2,955	50		20,857		2,640
	60		27,507		3,060	60		27,880		2,695
Total available for sale:
Unrealized loss for less than twelve months	35		94,358		2,789	34		80,456		2,579
Unrealized loss for twelve months or longer	334		1,324,703		111,599	336		1,348,786		112,756
	369	$	1,419,061	$	114,388	370	$	1,429,242	$	115,335

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Notes to Consolidated Financial Statements (continued)

(Unaudited)


	March 31, 2024					December 31, 2023
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Held to Maturity
U.S. government agencies:
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	—	$	—	$	—	—	$	—	$	—
Unrealized loss for twelve months or longer	45		273,004		29,334	44		278,172		25,765
	45		273,004		29,334	44		278,172		25,765
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	—		—		—	—		—		—
Unrealized loss for twelve months or longer	29		154,917		13,422	31		160,208		12,670
	29		154,917		13,422	31		160,208		12,670
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	—		—		—	—		—		—
Unrealized loss for twelve months or longer	54		238,891		38,969	54		247,019		37,189
	54		238,891		38,969	54		247,019		37,189
States and political subdivisions:
Unrealized loss for less than twelve months	48		21,730		618	39		15,506		479
Unrealized loss for twelve months or longer	129		44,884		5,436	128		45,208		4,865
	177		66,614		6,054	167		60,714		5,344
Total held to maturity:
Unrealized loss for less than twelve months	48		21,730		618	39		15,506		479
Unrealized loss for twelve months or longer	257		711,696		87,161	257		730,607		80,489
	305	$	733,426	$	87,779	296	$	746,113	$	80,968

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at March 31, 2024 are shown by contractual maturity below (in thousands).


	Available for Sale				Held to Maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	32,601	$	32,497	$	310	$	310
Due after one year through five years		78,846		77,196		2,729		2,595
Due after five years through ten years		52,859		52,284		37,772		35,501
Due after ten years		60,134		57,479		36,602		33,025
		224,440		219,456		77,413		71,431

Residential mortgage-backed securities		389,134		347,636		273,005		243,671
Commercial mortgage-backed securities		196,627		190,089		162,273		148,851
Collateralized mortgage obligations		783,966		723,374		277,859		238,890
	$	1,594,167	$	1,480,555	$	790,550	$	702,843

The Company recognized net gains of $2.9 million and $10.5 million from its trading portfolio during the three months ended March 31, 2024 and 2023, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $32.3 million and $32.6 million during the three months ended March 31, 2024 and 2023, respectively. The Company had no other realized gains and losses on securities during the three months ended March 31, 2024 and 2023, respectively. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $624.0 million and $537.2 million (with a fair value of $574.1 million and $503.1 million, respectively) at March 31, 2024 and December 31, 2023, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at March 31, 2024 and December 31, 2023.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

Mortgage-backed securities and collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States.

5. Loans Held for Investment

The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of real estate (including construction and land development), wholesale/retail trade, agribusiness and energy. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are not included in the consolidated financial statements.

Loans held for investment summarized by portfolio segment are as follows (in thousands).


	March 31,		December 31,
	2024		2023
Commercial real estate:
Non-owner occupied	$	1,932,746	$	1,889,882
Owner occupied		1,449,249		1,422,234
Commercial and industrial		1,613,301		1,607,833
Construction and land development		933,405		1,031,095
1-4 family residential		1,773,376		1,757,178
Consumer		27,941		27,351
Broker-dealer ⁽¹⁾		332,675		344,172
		8,062,693		8,079,745
Allowance for credit losses		(104,231)		(111,413)
Total loans held for investment, net of allowance	$	7,958,462	$	7,968,332

(1)

Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.

Past Due Loans and Nonaccrual Loans

An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
March 31, 2024	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	3,904	$	—	$	799	$	4,703	$	1,928,043	$	1,932,746	$	—
Owner occupied		8,117		150		10		8,277		1,440,972		1,449,249		—
Commercial and industrial		1,100		150		3,330		4,580		1,608,721		1,613,301		2,537
Construction and land development		4,888		—		277		5,165		928,240		933,405		—
1-4 family residential		8,300		679		1,927		10,906		1,762,470		1,773,376		13
Consumer		125		14		3		142		27,799		27,941		—
Broker-dealer		—		—		—		—		332,675		332,675		—
	$	26,434	$	993	$	6,346	$	33,773	$	8,028,920	$	8,062,693	$	2,550

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Notes to Consolidated Financial Statements (continued)

(Unaudited)


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
December 31, 2023	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	6,125	$	—	$	799	$	6,924	$	1,882,958	$	1,889,882	$	—
Owner occupied		6,823		386		3,897		11,106		1,411,128		1,422,234		—
Commercial and industrial		3,348		1,496		2,074		6,918		1,600,915		1,607,833		—
Construction and land development		767		1,554		276		2,597		1,028,498		1,031,095		—
1-4 family residential		8,625		1,292		3,203		13,120		1,744,058		1,757,178		—
Consumer		28		4		5		37		27,314		27,351		—
Broker-dealer		—		—		—		—		344,172		344,172		—
	$	25,716	$	4,732	$	10,254	$	40,702	$	8,039,043	$	8,079,745	$	—

In addition to the loans shown in the tables above, PrimeLending had $110.2 million and $115.1 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $111.0 million and $115.7 million, respectively) that were 90 days past due and accruing interest at March 31, 2024 and December 31, 2023, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).


	Non-accrual Loans
	March 31, 2024						December 31, 2023						Interest Income Recognized
	With		With No				With		With No				Three Months Ended March 31,
	Allowance		Allowance		Total		Allowance		Allowance		Total		2024		2023
Commercial real estate:
Non-owner occupied	$	422	$	2,688	$	3,110	$	33,728	$	2,712	$	36,440	$	1,194	$	123
Owner occupied		4,702		144		4,846		4,630		468		5,098		93		63
Commercial and industrial		6,527		5,638		12,165		5,216		4,286		9,502		102		131
Construction and land development		500		—		500		533		2,749		3,282		42		7
1-4 family residential		626		7,405		8,031		726		9,283		10,009		493		456
Consumer		3		—		3		6		—		6		—		—
Broker-dealer		—		—		—		—		—		—		—		—
	$	12,780	$	15,875	$	28,655	$	44,839	$	19,498	$	64,337	$	1,924	$	780

At March 31, 2024 and December 31, 2023, $4.5 million and $4.0 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

As shown in the table above, loans accounted for on a non-accrual basis decreased from December 31, 2023 to March 31, 2024 by $35.7 million. The change in non-accrual loans was primarily due to decreases in commercial real estate non-owner occupied loans of $33.3 million, construction and land development loans of $2.8 million and 1-4 family residential loans of $2.0 million, partially offset by an increase in commercial and industrial loans of $2.7 million. The decrease in commercial real estate non-owner occupied loans in non-accrual status was primarily due to the reclassification of a single loan from loans held for investment to loans held for sale, for which the non-accrual status was retained. The decrease in construction and land development loans in non-accrual status was primarily due to the payoff of a single relationship with an aggregate loan balance of $2.7 million since December 31, 2023, partially offset by principal paydowns. The decrease in 1-4 family residential loans in non-accrual status since December 31, 2023 was primarily due to $1.0 million of loans that were returned to accrual status and principal payoffs. The increase in commercial and industrial loans was primarily due to the addition of thirteen relationships with an aggregate loan balance of $7.3 million to non-accrual status since December 31, 2023, partially offset by principal payoffs.

The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances, such as expected cash flow recovery. The practical expedient to measure the allowance using the fair value of the collateral has been implemented.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

~~The following tables include a rollforward for those material financial instruments measured at fair value using Level 3 inputs (in thousands).~~

Total Gains or Losses

(Realized or Unrealized)


Balance,





Transfers



Included in Other


Beginning of

Purchases/

Sales/

to (from)

Included in

Comprehensive

Balance,

Period

Additions

Reductions

Level 3

Net Income

Income (Loss)

End of Period
Three months ended September 30, 2023

Available for sale securities

$
—

$
11,696

$
—

$
—

$
304

$
—

$
12,000
Loans held for sale

41,292

17,219

(9,171)

—

(13,142)

—

36,198
Loans held for investment

9,714

—

—

—

285

—

9,999
MSR asset

95,101

3,759

—

—

6,091

—

104,951
Total

$
146,107

$
32,674

$
(9,171)

$
—

$
(6,462)

$
—

$
163,148

Nine months ended September 30, 2023

Available for sale securities

$
—

$
11,696

$
—

$
—

$
304

$
—

$
12,000
Loans held for sale

40,707

54,727

(39,900)

(446)

(18,890)

—

36,198
Loans held for investment

9,181

—

—

—

818

—

9,999
MSR asset

100,825

23,859

(19,055)

—

(678)

—

104,951
Total

$
150,713

$
90,282

$
(58,955)

$
(446)

$
(18,446)

$
—

$
163,148

Three months ended September 30, 2022

Loans held for sale

$
41,732

$
18,012

$
(19,594)

$
(251)

$
(2,485)

$
—

$
37,414
Loans held for investment

9,027

—

—

—

(115)

—

8,912
MSR asset

121,688

29,340

—

—

5,511

—

156,539
Total

$
172,447

$
47,352

$
(19,594)

$
(251)

$
2,911

$
—

$
202,865

Nine months ended September 30, 2022

Loans held for sale

$
47,716

$
38,454

$
(44,342)

$
5,587

$
(10,001)

$
—

$
37,414
Loans held for investment

—

9,611

(562)

—

(137)

—

8,912
MSR asset

86,990

47,850

(1,876)

—

23,575

—

156,539
Total

$
134,706

$
95,915

$
(46,780)

$
5,587

$
13,437

$
—

$
202,865

For material Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows.

Range (Weighted-Average)
Financial instrument

Valuation Technique

Unobservable Inputs

September 30, 2023

December 31, 2022
Available for sale securities

Discounted cash flow

Discount rate

15.00
%

—

Loans held for sale

Market comparable

Projected price

78
-
89
%
(
87
%)

88
-
95
%
(
89
%)

Loans held for investment

Discounted cash flow

Discount rate

11.50
%

11.88
%

MSR asset

Discounted cash flow

Constant prepayment rate

7.30
%

8.14
%

Discount rate

11.70
%

12.10
%

The fair value of certain available for sale securities and loans held for investment by the Company’s merchant bank subsidiary are measured using the income approach with Level 3 inputs. The fair value of such financial instruments are based upon estimates of expected cash flows using unobservable inputs, including credit spreads derived from comparable securities and benchmark credit curves, and management’s knowledge of underlying collateral.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The MSR asset is reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022




Other

Total



Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value

Gains (Losses)

Income

Fair Value
Loans held for sale

$
(3,330)

$
—

$
(3,330)

$
(37,526)

$
—

$
(37,526)
Loans held for investment

—

—

—

(377)

—

(377)
MSR asset

6,091

—

6,091

5,511

—

5,511

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022




Other

Total



Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value

Gains (Losses)

Income

Fair Value
Loans held for sale

$
(5,563)

$
—

$
(5,563)

$
(73,520)

$
—

$
(73,520)
Loans held for investment

—

—

—

(660)

—

(660)
MSR asset

(678)

—

(678)

23,575

—

23,575

~~Financial Assets and Liabilities Not Measured at Fair Value on Recurring or Non-Recurring Basis~~

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 4 to the consolidated financial statements included in the Company’s 2022 Form 10-K.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).~~

Estimated Fair Value


Carrying

Level 1

Level 2

Level 3


September 30, 2023

Amount

Inputs

Inputs

Inputs

Total
Financial assets:

Cash and cash equivalents

$
1,517,397

$
1,517,397

$
—

$
—

$
1,517,397
Assets segregated for regulatory purposes

47,491

47,491

—

—

47,491
Securities purchased under agreements to resell

123,719

—

123,719

—

123,719
Held to maturity securities

825,079

—

703,366

—

703,366
Loans held for sale

125,324

—

99,479

26,361

125,840
Loans held for investment, net

8,083,231

—

357,244

7,661,201

8,018,445
Broker-dealer and clearing organization receivables

1,460,352

—

1,460,352

—

1,460,352
Other assets

79,704

—

78,059

1,645

79,704

Financial liabilities:

Deposits

11,103,097

—

11,086,261

—

11,086,261
Broker-dealer and clearing organization payables

1,368,064

—

1,368,064

—

1,368,064
Short-term borrowings

882,999

—

882,999

—

882,999
Debt

347,020

—

324,346

—

324,346
Other liabilities

18,793

—

18,793

—

18,793

Estimated Fair Value


Carrying

Level 1

Level 2

Level 3


December 31, 2022

Amount

Inputs

Inputs

Inputs

Total
Financial assets:

Cash and cash equivalents

$
1,580,162

$
1,580,162

$
—

$
—

$
1,580,162
Assets segregated for regulatory purposes

67,737

67,737

—

—

67,737
Securities purchased under agreements to resell

118,070

—

118,070

—

118,070
Held to maturity securities

875,532

—

785,335

—

785,335
Loans held for sale

126,919

—

82,684

42,908

125,592
Loans held for investment, net

7,988,050

—

431,223

7,434,038

7,865,261
Broker-dealer and clearing organization receivables

1,038,055

—

1,038,055

—

1,038,055
Other assets

77,052

—

75,386

1,666

77,052

Financial liabilities:

Deposits

11,315,749

—

11,295,153

—

11,295,153
Broker-dealer and clearing organization payables

966,470

—

966,470

—

966,470
Short-term borrowings

970,056

—

970,056

—

970,056
Debt

346,654

—

350,104

—

350,104
Other liabilities

5,410

—

5,410

—

5,410

The Company held equity investments other than securities of $55.0 million and $57.6 million at September 30, 2023 and December 31, 2022, respectively, which are included within other assets in the consolidated balance sheets. Of the $55.0 million of such equity investments held at September 30, 2023, $23.2 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

~~The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).~~

Three Months Ended September 30,

Nine Months Ended September 30,


2023

2022

2023

2022
Balance, beginning of period

$
22,654

$
28,183

$
27,264

$
16,817
Additional investments

374

—

374

11,000
Upward adjustments

186

234

611

679
Impairments and downward adjustments

(21)

(1,013)

(5,056)

(1,092)
Balance, end of period

$
23,193

$
27,404

$
23,193

$
27,404

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~4. Securities~~

~~The fair value of trading securities is summarized as follows (in thousands).~~

September 30,

December 31,

2023

2022
U.S. Treasury securities

$
5,488

$
10,466
U.S. government agencies:

Bonds

26,776

20,878
Residential mortgage-backed securities

93,285

214,100
Collateralized mortgage obligations

159,171

182,717
Other

13,423

—
Corporate debt securities

57,707

42,685
States and political subdivisions

183,755

260,271
Private-label securitized product

29,020

9,265
Other

10,276

14,650
Totals

$
578,901

$
755,032

In addition to the securities shown above, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligations may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $51.5 million and $53.0 million at September 30, 2023 and December 31, 2022, respectively.

~~The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).~~

Available for Sale

Amortized

Unrealized

Unrealized

September 30, 2023

Cost

Gains

Losses

Fair Value
U.S. Treasury securities

$
4,984

$
—

$
(493)

$
4,491
U.S. government agencies:

Bonds

166,637

163

(1,421)

165,379
Residential mortgage-backed securities

404,042

2

(56,194)

347,850
Commercial mortgage-backed securities

177,618

—

(9,598)

168,020
Collateralized mortgage obligations

804,096

6

(77,667)

726,435
Corporate debt securities

12,000

—

—

12,000
States and political subdivisions

36,963

1

(4,901)

32,063
Totals

$
1,606,340

$
172

$
(150,274)

$
1,456,238

Available for Sale

Amortized

Unrealized

Unrealized

December 31, 2022

Cost

Gains

Losses

Fair Value
U.S. Treasury securities

$
19,655

$
3

$
(514)

$
19,144
U.S. government agencies:

Bonds

202,834

323

(900)

202,257
Residential mortgage-backed securities

455,121

12

(48,775)

406,358
Commercial mortgage-backed securities

183,266

65

(7,832)

175,499
Collateralized mortgage obligations

887,521

—

(68,627)

818,894
States and political subdivisions

40,160

57

(3,603)

36,614
Totals

$
1,788,557

$
460

$
(130,251)

$
1,658,766

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Held to Maturity

Amortized

Unrealized

Unrealized

September 30, 2023

Cost

Gains

Losses

Fair Value
U.S. government agencies:

Residential mortgage-backed securities

$
283,620

$
—

$
(42,001)

$
241,619
Commercial mortgage-backed securities

173,191

—

(18,997)

154,194
Collateralized mortgage obligations

290,843

—

(49,016)

241,827
States and political subdivisions

77,425

—

(11,699)

65,726
Totals

$
825,079

$
—

$
(121,713)

$
703,366

Held to Maturity

Amortized

Unrealized

Unrealized

December 31, 2022

Cost

Gains

Losses

Fair Value
U.S. government agencies:

Residential mortgage-backed securities

$
301,583

$
—

$
(29,727)

$
271,856
Commercial mortgage-backed securities

180,942

—

(14,935)

166,007
Collateralized mortgage obligations

314,705

—

(38,343)

276,362
States and political subdivisions

78,302

26

(7,218)

71,110
Totals

$
875,532

$
26

$
(90,223)

$
785,335

Additionally, the Company had unrealized net gains of $0.2 million and $0.1 million at September 30, 2023 and December 31, 2022, respectively, from equity securities with fair values of $0.3 million and $0.2 million held at September 30, 2023 and December 31, 2022, respectively. The Company recognized nominal net gains during the three months ended September 30, 2023 and 2022, respectively, and recognized net gains of $0.1 million and net losses of $0.1 million during the nine months ended September 30, 2023 and 2022, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three and nine months ended September 30, 2023 and 2022, net gains and losses recognized from equity securities sold were nominal.

The Company transferred certain agency-issued securities from the available-for-sale to held-to-maturity portfolio on March 31, 2022 having a book value of approximately $782 million and a market value of approximately $708 million. As of the date of transfer, the related pre-tax net unrecognized losses of approximately $74 million within the accumulated other comprehensive loss balance are being amortized over the remaining term of the securities using the effective interest method. This transfer was completed after careful consideration of the Company’s intent and ability to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).~~

September 30, 2023

December 31, 2022


Number of



Unrealized

Number of



Unrealized

Securities

Fair Value

Losses

Securities

Fair Value

Losses
Available for Sale

U.S. treasury securities:

Unrealized loss for less than twelve months

—

$
—

$
—

—

$
—

$
—
Unrealized loss for twelve months or longer

1

4,491

493

1

4,465

514

1

4,491

493

1

4,465

514
U.S. government agencies:

Bonds:

Unrealized loss for less than twelve months

17

109,390

951

15

98,246

388
Unrealized loss for twelve months or longer

9

46,161

470

3

15,263

512

26

155,551

1,421

18

113,509

900
Residential mortgage-backed securities:

Unrealized loss for less than twelve months

2

761

33

95

168,351

10,036
Unrealized loss for twelve months or longer

124

346,191

56,161

30

236,739

38,739

126

346,952

56,194

125

405,090

48,775
Commercial mortgage-backed securities:

Unrealized loss for less than twelve months

3

14,456

858

11

79,337

2,047
Unrealized loss for twelve months or longer

18

184,326
��

8,740

8

86,923

5,785

21

198,782

9,598

19

166,260

7,832
Collateralized mortgage obligations:

Unrealized loss for less than twelve months

4

30,975

338

97

563,872

30,980
Unrealized loss for twelve months or longer

137

704,787

77,329

48

244,917

37,647

141

735,762

77,667

145

808,789

68,627
States and political subdivisions:

Unrealized loss for less than twelve months

19

11,099

398

34

20,555

964
Unrealized loss for twelve months or longer

50

18,988

4,503

29

7,892

2,639

69

30,087

4,901

63

28,447

3,603
Total available for sale:

Unrealized loss for less than twelve months

45

166,681

2,578

252

930,361

44,415
Unrealized loss for twelve months or longer

339

1,304,944

147,696

119

596,199

85,836

384

$
1,471,625

$
150,274

371

$
1,526,560

$
130,251

September 30, 2023

December 31, 2022


Number of



Unrealized

Number of



Unrealized

Securities

Fair Value

Losses

Securities

Fair Value

Losses
Held to Maturity

U.S. government agencies:

Residential mortgage-backed securities:

Unrealized loss for less than twelve months

—

$
—

$
—

14

$
59,089

$
5,928
Unrealized loss for twelve months or longer

45

241,618

42,001

31

212,768

23,799

45

241,618

42,001

45

271,857

29,727
Commercial mortgage-backed securities:

Unrealized loss for less than twelve months

—

—

—

30

163,172

14,483
Unrealized loss for twelve months or longer

30

154,194

18,997

1

2,834

452

30

154,194

18,997

31

166,006

14,935
Collateralized mortgage obligations:

Unrealized loss for less than twelve months

—

—

—

18

33,836

3,225
Unrealized loss for twelve months or longer

54

241,827

49,016

38

242,527

35,118

54

241,827

49,016

56

276,363

38,343
States and political subdivisions:

Unrealized loss for less than twelve months

52

24,904

2,192

150

59,459

5,362
Unrealized loss for twelve months or longer

129

40,821

9,507

27

8,093

1,856

181

65,725

11,699

177

67,552

7,218
Total held to maturity:

Unrealized loss for less than twelve months

52

24,904

2,192

212

315,556

28,998
Unrealized loss for twelve months or longer

258

678,460

119,521

97

466,222

61,225

310

$
703,364

$
121,713

309

$
781,778

$
90,223

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at September 30, 2023 are shown by contractual maturity below (in thousands).

Available for Sale

Held to Maturity


Amortized



Amortized


Cost

Fair Value

Cost

Fair Value
Due in one year or less

$
11,653

$
11,469

$
310

$
309
Due after one year through five years

84,392

82,835

2,730

2,505
Due after five years through ten years

59,722

58,814

35,679

31,128
Due after ten years

64,817

60,815

38,706

31,784

220,584

213,933

77,425

65,726

Residential mortgage-backed securities

404,042

347,850

283,620

241,619
Commercial mortgage-backed securities

177,618

168,020

173,191

154,194
Collateralized mortgage obligations

804,096

726,435

290,843

241,827

$
1,606,340

$
1,456,238

$
825,079

$
703,366

The Company recognized net gains of $4.9 million and net losses of $3.2 million from its trading portfolio during the three months ended September 30, 2023 and 2022, respectively, and net gains of $24.6 million and net losses of $7.9 million during the nine months ended September 30, 2023 and 2022, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $7.6 million and $16.6 million during the three months ended September 30, 2023 and 2022, respectively, and net gains from structured product trading activities of $51.5 million and $25.6 million during the nine months ended September 30, 2023 and 2022, respectively. The Company had nominal other realized gains and losses on securities during the three and nine months ended September 30, 2023 and 2022, respectively. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $492.7 million and $778.6 million (with a fair value of $439.8 million and $717.6 million, respectively) at September 30, 2023 and December 31, 2022, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at September 30, 2023 and December 31, 2022.

Mortgage-backed securities and collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored enterprises, and conditionally guaranteed by the full faith and credit of the United States.

~~5. Loans Held for Investment~~

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~Loans held for investment summarized by portfolio segment are as follows (in thousands).~~

September 30,

December 31,

2023

2022
Commercial real estate

$
3,285,899

$
3,245,873
Commercial and industrial

1,662,737

1,639,980
Construction and land development

1,088,701

980,896
1-4 family residential

1,783,259

1,767,099
Consumer

26,212

27,602
Broker-dealer ⁽¹⁾

357,244

431,223

8,204,052

8,092,673
Allowance for credit losses

(110,822)

(95,442)
Total loans held for investment, net of allowance

$
8,093,230

$
7,997,231

~~(1)~~

~~Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.~~

~~Past Due Loans and Nonaccrual Loans~~

~~An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).~~

Accruing Loans

Loans Past Due

Total Past

Current

Total

Past Due
September 30, 2023

30-59 Days

60-89 Days

90 Days or More

Due Loans

Loans

Loans

90 Days or More
Commercial real estate:

Non-owner occupied

$
957

$
—

$
—

$
957

$
1,877,206

$
1,878,163

$
—
Owner occupied

1,072

3,893

12

4,977

1,402,759

1,407,736

—
Commercial and industrial

2,032

193

3,613

5,838

1,656,899

1,662,737

—
Construction and land development

4,941

1

—

4,942

1,083,759

1,088,701

—
1-4 family residential

4,269

1,804

2,706

8,779

1,774,480

1,783,259

—
Consumer

41

9

8

58

26,154

26,212

—
Broker-dealer

—

—

—

—

357,244

357,244

—

$
13,312

$
5,900

$
6,339

$
25,551

$
8,178,501

$
8,204,052

$
—

Accruing Loans

Loans Past Due

Total Past

Current

Total

Past Due
December 31, 2022

30-59 Days

60-89 Days

90 Days or More

Due Loans

Loans

Loans

90 Days or More
Commercial real estate:

Non-owner occupied

$
567

$
—

$
235

$
802

$
1,869,750

$
1,870,552

$
—
Owner occupied

1,037

2,880

—

3,917

1,371,404

1,375,321

—
Commercial and industrial

609

82

5,598

6,289

1,633,691

1,639,980

49
Construction and land development

3,665

—

—

3,665

977,231

980,896

—
1-4 family residential

9,733

773

4,467

14,973

1,752,126

1,767,099

1
Consumer

177

7

14

198

27,404

27,602

1
Broker-dealer

—

—

—

—

431,223

431,223

—

$
15,788

$
3,742

$
10,314

$
29,844

$
8,062,829

$
8,092,673

$
51

In addition to the loans shown in the tables above, PrimeLending had $106.3 million and $92.0 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $106.6 million and $92.4 million, respectively) that were 90 days past due and accruing interest at September 30, 2023 and December 31, 2022, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).~~

Non-accrual Loans

September 30, 2023

December 31, 2022

Interest Income Recognized

With

With No

With

With No

Three Months Ended September 30,

Nine Months Ended September 30,

Allowance

Allowance

Total

Allowance

Allowance

Total

2023

2022

2023

2022
Commercial real estate:

Non-owner occupied

$
432

$
1,943

$
2,375

$
688

$
562

$
1,250

$
83

$
265

$
264

$
422
Owner occupied

4,649

315

4,964

2,862

157

3,019

141

88

465

505
Commercial and industrial

714

9,476

10,190

3,727

5,368

9,095

1,564

303

1,833

930
Construction and land development

562

—

562

1

—

1

9

7

45

22
1-4 family residential

560

8,911

9,471

433

10,862

11,295

432

561

1,267

2,286
Consumer

7

—

7

14

—

14

—

—

—

—
Broker-dealer

—

—

—

—

—

—

—

—

—

—

$
6,924

$
20,645

$
27,569

$
7,725

$
16,949

$
24,674

$
2,229

$
1,224

$
3,874

$
4,165

At September 30, 2023 and December 31, 2022, $3.9 million and $4.8 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

As shown in the table above, loans accounted for on a non-accrual basis increased from December 31, 2022 to September 30, 2023 by $2.9 million. The change in non-accrual loans was primarily due to increases in commercial real estate owner occupied loans of $1.9 million, commercial real estate non-owner occupied loans of $1.1 million and commercial and industrial loans of $1.1 million, partially offset by a decrease in 1-4 family residential loans of $1.8 million. The increase in commercial real estate owner occupied loans in non-accrual status was primarily due to the addition of a single relationship with an aggregate loan balance of $3.9 million since December 31, 2022, partially offset by the foreclosure of one office property in Texas. The increase in commercial real estate non-owner occupied loans in non-accrual status was primarily due to the addition of a single relationship with an aggregate loan balance of $1.4 million since December 31, 2022, partially offset by principal payoffs. The increase in commercial and industrial loans was primarily due to the addition of four relationships with an aggregate loan balance of $7.5 million to non-accrual status since December 31, 2022, partially offset by principal payoffs. The decrease in 1-4 family residential loans in non-accrual status since December 31, 2022 was primarily due to principal payoffs and foreclosures.

Loan Modifications

As previously discussed, as of January 1, 2023, the Company adopted the new guidance which eliminated the recognition and measurement guidance on TDRs for creditors, and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules.

The ~~Bank may also reconfigure a single loan into two or more~~following table presents the amortized cost basis of the loans ~~(“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off~~held for investment modified for borrowers experiencing financial difficulty grouped by portfolio segment and ~~a “good” loan or~~type of modification granted during the periods presented (in thousands).


									Total
									Modifications as a
	Interest Rate		Term		Principal		Payment		% of Portfolio
Three Months Ended March 31, 2024	Reduction		Extension		Forgiveness		Delay		Segment
Commercial real estate:
Non-owner occupied	$	—	$	—	$	—	$	—	—	%
Owner occupied		—		491		—		3,882	0.3	%
Commercial and industrial		—		16,797		—		166	1.1	%
Construction and land development		—		223		—		1,729	0.2	%
1-4 family residential		—		—		—		—	—	%
Consumer		—		—		—		—	—	%
Broker-dealer		—		—		—		—	—	%
Total	$	—	$	17,511	$	—	$	5,777	0.3	%


									Total
									Modifications as a
	Interest Rate		Term		Principal		Payment		% of Portfolio
Three Months Ended March 31, 2023	Reduction		Extension		Forgiveness		Delay		Segment
Commercial real estate:
Non-owner occupied	$	—	$	37,972	$	—	$	—	2.1	%
Owner occupied		—		2,235		—		—	0.2	%
Commercial and industrial		—		1,364		—		3,000	0.3	%
Construction and land development		—		—		—		—	—	%
1-4 family residential		—		—		—		—	—	%
Consumer		—		—		—		—	—	%
Broker-dealer		—		—		—		—	—	%
Total	$	—	$	41,571	$	—	$	3,000	0.5	%

For those loans held for investment modified for borrowers experiencing financial difficulty during the ~~terms of which comply with~~last twelve months, the ~~Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.~~following table provides aging and non-accrual details grouped by portfolio segment (in thousands).


	Modified Loans Past Due						Total Modified		Modified
March 31, 2024	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Non-accrual Loans
Commercial real estate:
Non-owner occupied	$	—	$	—	$	—	$	—	$	32,247
Owner occupied		3,882		—		10		3,892		3,980
Commercial and industrial		242		—		2,475		2,717		3,417
Construction and land development		—		—		—		—		223
1-4 family residential		—		—		—		—		—
Consumer		—		—		—		—		—
Broker-dealer		—		—		—		—		—
Total	$	4,124	$	—	$	2,485	$	6,609	$	39,867

2120

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following table presents the amortized cost basis of the loans held for investment modified for borrowers experiencing financial difficulty grouped by portfolio segment and type of modification granted during the periods presented (in thousands).

Total

Modifications as a

Interest Rate

Term

Principal

Payment

% of Portfolio

Three Months Ended September 30, 2023

Reduction

Extension

Forgiveness

Delay

Segment

Commercial real estate:

Non-owner occupied

$
—

$
382

$
—

$
—

—
%
Owner occupied

—

12

—

—

—
%
Commercial and industrial

—

11,440

—

—

0.7
%
Construction and land development

—

—

—

—

—
%
1-4 family residential

—

—

—

—

—
%
Consumer

—

—

—

—

—
%
Broker-dealer

—

—

—

—

—
%
Total

$
—

$
11,834

$
—

$
—

0.1
%

Total

Modifications as a

Interest Rate

Term

Principal

Payment

% of Portfolio

Nine Months Ended September 30, 2023

Reduction

Extension

Forgiveness

Delay

Segment

Commercial real estate:

Non-owner occupied

$
—

$
34,784

$
—

$
—

1.9
%
Owner occupied

—

2,205

—

—

0.2
%
Commercial and industrial

—

15,057

—

2,868

1.1
%
Construction and land development

—

286

—

—

—
%
1-4 family residential

—

—

—

—

—
%
Consumer

—

—

—

—

—
%
Broker-dealer

—

—

—

—

—
%
Total

$
—

$
52,332

$
—

$
2,868

0.7
%

The following table presents the financial effects of the loans held for investment modified for borrowers experiencing financial difficulty during the periods presented (in thousands).


	Weighted-Average Term Extension (in months)		Weighted-Average Term Extension (in months)
	Three Months Ended	Nine Months Ended	Three Months Ended	Three Months Ended
	September 30, 2023	September 30, 2023	March 31, 2024	March 31, 2023
Commercial real estate:
Non-owner occupied	12	26	—	13
Owner occupied	24	35	14	35
Commercial and industrial	11	11	11	9
Construction and land development	—	9	15	—
1-4 family residential	—	—	—	—
Consumer	—	—	—	—
Broker-dealer	—	—	—	—
Total	11	22	11	14

~~There were no loans that have been modified during the nine months ended September 30, 2023 for which a payment was at least 30 days past due.~~

~~Troubled Debt Restructurings~~

There were no TDRs granted during the three months ended September 30, 2022. There were three TDRs granted during the nine months ended September 30, 2022 with an aggregate balance at date of extension of $3.6 million and an aggregate balance at September 30, 2022 of $2.9 million. The Bank had no unadvanced commitments to borrowers whose loans had been restructured in TDRs at September 30, 2022. There were no TDRs granted during the twelve months preceding September 30, 2022 for which a payment was at least 30 days past due.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Credit Risk Profile

Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, and (iv) general economic conditions in state and local markets. The Company defines classified loans as loans with a risk rating of substandard, doubtful or loss. There have been no changes to the risk rating internal grades utilized for commercial loans as described in detail in Note 65 to the consolidated financial statements in the Company’s ~~2022~~2023 Form 10-K.

~~The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).~~

Amortized Cost Basis by Origination Year

Loans

2018 and

Converted to

September 30, 2023

2023

2022

2021

2020

2019

Prior

Revolving

Term Loans

Total
Commercial real estate: non-owner occupied

Internal Grade 1-3 (Pass low risk)

$
3,163

$
31,616

$
32,778

$
17,913

$
7,735

$
5,594

$
(26)

$
189

$
98,962
Internal Grade 4-7 (Pass normal risk)

129,170

286,269

370,985

118,082

69,726

48,999

34,867

16,725

1,074,823
Internal Grade 8-11 (Pass high risk and watch)

107,113

176,060

102,960

92,100

55,752

77,102

13,320

814

625,221
Internal Grade 12 (Special mention)

—

—

—

—

—

—

—

—

—
Internal Grade 13 (Substandard accrual)

40,821

11,736

14,108

2,553

6,812

752

—

—

76,782
Internal Grade 14 (Substandard non-accrual)

382

1,414

—

—

—

579

—

—

2,375
Current period gross charge-offs

—

—

—

—

—

34

��

—

34

Commercial real estate: owner occupied

Internal Grade 1-3 (Pass low risk)

$
37,769

$
30,817

$
105,834

$
41,817

$
17,690

$
45,379

$
2,238

$
14,321

$
295,865
Internal Grade 4-7 (Pass normal risk)

93,484

172,896

148,564

71,022

63,119

123,573

16,538

—

689,196
Internal Grade 8-11 (Pass high risk and watch)

47,496

79,546

72,988

89,217

19,041

66,033

5,149

1,505

380,975
Internal Grade 12 (Special mention)

—

—

—

—

1,024

—

—

—

1,024
Internal Grade 13 (Substandard accrual)

2,546

3,384

5,166

7,548

5,656

11,314

98

—

35,712
Internal Grade 14 (Substandard non-accrual)

12

4,053

655

—

—

244

—

—

4,964
Current period gross charge-offs

—

—

—

—

—

977

—

—

977

Commercial and industrial

Internal Grade 1-3 (Pass low risk)

$
19,309

$
30,115

$
30,538

$
15,463

$
20,118

$
1,857

$
28,897

$
17

$
146,314
Internal Grade 4-7 (Pass normal risk)

58,360

80,794

135,009

25,721

4,521

10,508

279,576

21,522

616,011
Internal Grade 8-11 (Pass high risk and watch)

85,308

127,147

39,601

38,824

7,464

8,063

234,197

2,688

543,292
Internal Grade 12 (Special mention)

—

—

132

—

—

—

33,841

—

33,973
Internal Grade 13 (Substandard accrual)

4,106

1,453

4,066

3,992

3,806

370

24,681

22,691

65,165
Internal Grade 14 (Substandard non-accrual)

69

370

147

1,917

—

3,776

—

3,911

10,190
Current period gross charge-offs

276

3,041

87

—

25

586

—

—

4,015

Construction and land development

Internal Grade 1-3 (Pass low risk)

$
5,322

$
15,201

$
12,927

$
—

$
812

$
341

$
—

$
—

$
34,603
Internal Grade 4-7 (Pass normal risk)

213,083

255,710

98,331

28,393

868

1,786

27,943

—

626,114
Internal Grade 8-11 (Pass high risk and watch)

141,367

163,554

46,959

4,073

2,370

232

1,436

9,486

369,477
Internal Grade 12 (Special mention)

—

—

373

—

—

—

—

—

373
Internal Grade 13 (Substandard accrual)

14,613

3,788

—

11,247

—

—

—

2,393

32,041
Internal Grade 14 (Substandard non-accrual)

277

285

—

—

—

—

—

—

562
Current period gross charge-offs

—

—

—

—

—

—

—

—

—

Construction and land development - individuals

FICO less than 620

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—
FICO between 620 and 720

2,750

867

—

—

—

919

—

—

4,536
FICO greater than 720

17,035

3,432

121

51

—

—

—

—

20,639
Substandard non-accrual

—

—

—

—

—

—

—

—

—
Other ⁽¹⁾

356

—

—

—

—

—

—

—

356
Current period gross charge-offs

—

—

—

—

—

—

—

—

—

1-4 family residential

FICO less than 620

$
—

$
1,457

$
646

$
756

$
255

$
23,792

$
237

$
—

$
27,143
FICO between 620 and 720

3,333

16,876

12,627

6,739

4,837

25,693

1,714

—

71,819
FICO greater than 720

136,432

546,544

742,656

90,218

38,609

55,815

3,547

630

1,614,451
Substandard non-accrual

—

534

—

—

—

8,937

—

—

9,471
Other ⁽¹⁾

20,233

21,387

12,008

1,385

2,238

3,122

2

—

60,375
Current period gross charge-offs

—

—

—

—

—

73

—

—

73

2321

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Amortized Cost Basis by Origination Year

Loans

2018 and

Converted to

September 30, 2023

2023

2022

2021

2020

2019

Prior

Revolving

Term Loans

Total
Consumer

FICO less than 620

$
709

$
546

$
47

$
88

$
8

$
4

$
352

$
7

$
1,761
FICO between 620 and 720

2,879

2,084

571

316

159

40

1,926

10

7,985
FICO greater than 720

2,527

3,163

1,011

726

78

2

2,416

1

9,924
Substandard non-accrual

—

—

—

—

—

7

—

—

7
Other ⁽¹⁾

3,598

2,064

336

312

64

15

146

—

6,535
Current period gross charge-offs

194

54

6

6

3

11

—

—

274

Total loans with credit quality measures

$
1,193,622

$
2,075,162

$
1,992,144

$
670,473

$
332,762

$
524,848

$
713,095

$
96,910

$
7,599,016
Commercial and industrial (mortgage warehouse lending)

$
237,793
Commercial and industrial (loans accounted for at fair value)

$
9,999
Broker-dealer (margin loans and correspondent receivables)

$
357,244
Total loans held for investment

$
8,204,052

The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).


	Amortized Cost Basis by Origination Year														Loans
												2019 and			Converted to
March 31, 2024	2024		2023		2022		2021		2020			Prior	Revolving		Term Loans		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	—	$	5,010	$	30,933	$	31,644	$	17,530	$	6,931	$	(21)	$	179	$	92,206
Internal Grade 4-7 (Pass normal risk)		9,205		183,150		285,243		374,563		132,824		124,113		36,624		16,540		1,162,262
Internal Grade 8-11 (Pass high risk and watch)		27,566		153,849		166,882		68,816		80,548		84,917		10,771		1,422		594,771
Internal Grade 12 (Special mention)		—		—		12,162		2,563		3,736		25,714		—		—		44,175
Internal Grade 13 (Substandard accrual)		—		6,296		11,607		13,929		1,033		3,357		—		—		36,222
Internal Grade 14 (Substandard non-accrual)		—		377		1,392		—		—		1,341		—		—		3,110
Current period gross charge-offs		—		1,647		—		—		—		—		—		—		1,647

Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	19,006	$	56,914	$	33,111	$	119,697	$	39,147	$	53,685	$	4,373	$	13,533	$	339,466
Internal Grade 4-7 (Pass normal risk)		15,407		104,368		158,299		135,907		60,725		176,501		17,938		9,235		678,380
Internal Grade 8-11 (Pass high risk and watch)		12,398		52,622		88,218		69,942		82,352		76,800		5,202		—		387,534
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		402		2,088		7,840		5,824		6,796		15,976		97		—		39,023
Internal Grade 14 (Substandard non-accrual)		3,882		160		88		637		—		79		—		—		4,846
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	343	$	14,915	$	15,525	$	43,524	$	12,135	$	20,196	$	35,574	$	—	$	142,212
Internal Grade 4-7 (Pass normal risk)		39,114		63,274		65,948		73,842		17,964		11,951		313,227		3,651		588,971
Internal Grade 8-11 (Pass high risk and watch)		62,717		96,763		96,683		68,465		33,984		9,698		224,948		2,612		595,870
Internal Grade 12 (Special mention)		—		—		—		—		—		—		1,349		—		1,349
Internal Grade 13 (Substandard accrual)		—		5,301		728		2,154		2,106		1,999		39,185		13,678		65,151
Internal Grade 14 (Substandard non-accrual)		166		225		701		232		934		904		2,158		6,845		12,165
Current period gross charge-offs		—		1,211		274		9		301		1,188		—		—		2,983

Construction and land development
Internal Grade 1-3 (Pass low risk)	$	225	$	2,479	$	6,123	$	1,532	$	—	$	305	$	—	$	—	$	10,664
Internal Grade 4-7 (Pass normal risk)		52,978		179,925		139,931		84,809		7,409		3,198		17,630		—		485,880
Internal Grade 8-11 (Pass high risk and watch)		63,057		173,123		134,265		4,881		2,106		2,474		12,247		4,539		396,692
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		—		15,554		491		112		—		—		—		—		16,157
Internal Grade 14 (Substandard non-accrual)		—		500		—		—		—		—		—		—		500
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		107		3,681		—		—		—		866		—		—		4,654
FICO greater than 720		924		17,707		—		120		50		—		—		—		18,801
Substandard non-accrual		—		—		—		—		—		—		—		—		—
Other ⁽¹⁾		57		—		—		—		—		—		—		—		57
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

1-4 family residential
FICO less than 620	$	—	$	637	$	1,437	$	496	$	745	$	22,413	$	222	$	—	$	25,950
FICO between 620 and 720		337		10,801		15,492		11,698		5,836		29,325		1,065		190		74,744
FICO greater than 720		37,088		142,481		524,346		710,247		84,905		86,038		3,250		425		1,588,780
Substandard non-accrual		—		—		—		—		—		8,031		—		—		8,031
Other ⁽¹⁾		12,932		35,924		16,963		3,425		1,365		4,676		272		314		75,871
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Consumer
FICO less than 620	$	329	$	560	$	392	$	34	$	76	$	8	$	358	$	6	$	1,763
FICO between 620 and 720		1,791		2,483		1,048		361		220		82		1,951		42		7,978
FICO greater than 720		1,479		3,207		2,254		753		277		16		2,277		1		10,264
Substandard non-accrual		—		—		—		—		—		3		—		—		3
Other ⁽¹⁾		3,769		2,728		1,065		162		21		34		154		—		7,933
Current period gross charge-offs		—		74		—		—		—		7		—		—		81

Total loans with credit quality measures	$	365,279	$	1,337,102	$	1,819,167	$	1,830,369	$	594,824	$	771,631	$	730,851	$	73,212	$	7,522,435
Commercial and industrial (mortgage warehouse lending)																	$	196,372
Commercial and industrial (loans accounted for at fair value)																	$	11,211
Broker-dealer (margin loans and correspondent receivables)																	$	332,675
Total loans held for investment																	$	8,062,693

(1) Loans classified in this category were assigned a FICO score for credit modeling purposes.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

6. Allowance for Credit Losses

Available for Sale Securities and Held to Maturity Securities

The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at ~~September 30, 2023.~~March 31, 2024. In addition, as of ~~September 30, 2023,~~March 31, 2024, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities and no allowance was recognized on the debt securities portfolio.

Loans Held for Investment

The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of ~~our~~the Company’s existing portfolio. Management’s methodology for determining the allowance for credit losses uses the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of ~~September 30, 2023.~~March 31, 2024. While the Company believes it has an appropriate allowance for the existing loan portfolio at ~~September 30, 2023,~~March 31, 2024, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as changes in macroeconomic forecasts and loan cash flow assumptions. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements in the Company’s ~~2022~~2023 Form 10-K.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine our best estimate of expected credit losses as of ~~September 30, 2023,~~March 31, 2024, the Company utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~September 2023~~March 2024 that was updated to reflect the U.S. economic outlook. This alternative economic scenario expects inflation ~~persistently~~to accelerate to higher than 3%. In response to rising inflation, Federal Reserve monetary policy raises the ~~baseline scenario as uneven supply chain and labor market conditions continue to reflect the impact of international armed conflicts, tighter lending standards resulting from bank failures earlier~~federal funds rate in ~~2023, and still elevated interest rates contribute~~2024 to a ~~mild U.S~~terminal range of 5.75% to 6%. The combination of the persistent inflation, the Federal Reserve rate increases, and declining confidence causes economic growth to decelerate during the remainder of 2024 and to fall into recession ~~starting~~ in the first quarter of ~~2024. Federal Reserve monetary policy maintains the elevated interest rates to a federal funds rate at the baseline target range of 5.25% to 5.50% into early 2024.~~2025. Significant variables that impact the modeled losses across our loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

During the three months ended ~~September 30, 2022,~~March 31, 2023, the ~~reversal of~~provision for credit losses reflected ~~modest improvements~~a build in the ~~U.S economic outlook compared~~allowance related to ~~assumptions in the prior quarter outlook, and in specific reserves and credit metrics~~loan portfolio changes since the prior quarter, ~~while~~offset by an updated economic outlook with a mild U.S. recession from fourth quarter of 2023 and recovery from the ~~increase in provision for credit losses~~third quarter of 2024 compared to prior quarter’s U.S. recession assumption during the ~~nine months ended September 30, 2022 was driven by a deteriorating U.S. economic outlook since December 31, 2021.~~last three quarters of 2023. The net impact to the allowance of changes associated with individually and collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 included ~~reversals of credit losses of $0.2 million and $1.2 million, respectively, while collectively evaluated loans included a reversal of credit losses of $0.5 million, compared to~~ a provision for credit losses on individually evaluated loans of ~~$5.9~~$0.7 million ~~respectively. The changes in~~attributable to the ~~allowance~~broker-dealer loan portfolio and a provision for credit losses ~~during the noted periods were primarily attributable to~~on collectively evaluated loans at the Bank ~~and also reflected other factors including, but not limited~~of $1.5 million due to ~~loan mix, and changes~~recent updates in internal risk ratings, growth in funded loan balances and ~~qualitative factors from~~renewals during the ~~prior~~ quarter. The changes in the allowance during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 were also impacted by net charge-offs of ~~$2.7 million and $4.2 million, respectively.~~$0.4 million.

During the three months ended ~~September 30, 2023,~~March 31, 2024, the ~~slight~~ reversal of credit losses reflected improvements to the U.S. economic outlook, ~~and decreases in specific reserves of $0.7 million within our broker dealer segment,~~ offset by increases in specific reserves ~~and net portfolio changes~~ within the banking segment. The increase in the provision for credit losses during the nine months ended September 30, 2023 reflected a significant build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets. Specific to the Bank, the net impact to the allowance of changes associated with collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included a reversal of credit losses of ~~$0.3~~$7.0 million, ~~compared to a provision for credit losses of $14.2 million, respectively, on collectively evaluated loans,~~ while the net impact to the allowance of changes associated with individually evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included a provision for credit losses of ~~$0.9 million and $3.0 million, respectively.~~$4.1 million. The changes in the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and nine months ended September 30, 2023 were also impacted by net recoveries of $1.6 million and net charge-offs of $1.7 million, respectively.

~~Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).~~

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Three Months Ended September 30, 2023

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
71,462

$
(1,567)

$
(34)

$
10

$
69,871
Commercial and industrial

17,315

838

(936)

2,505

19,722
Construction and land development

7,395

1,575

—

—

8,970
1-4 family residential

11,618

(179)

—

33

11,472
Consumer

615

8

(152)

130

601
Broker-dealer

901

(715)

—

—

186
Total

$
109,306

$
(40)

$
(1,122)

$
2,678

$
110,822

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Nine Months Ended September 30, 2023

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
63,255

$
7,586

$
(1,011)

$
41

$
69,871
Commercial and industrial

16,035

4,417

(4,015)

3,285

19,722
Construction and land development

6,051

2,919

—

—

8,970
1-4 family residential

9,313

2,147

(73)

85

11,472
Consumer

554

106

(274)

215

601
Broker-dealer

234

(48)

—

—

186
Total

$
95,442

$
17,127

$
(5,373)

$
3,626

$
110,822

2523

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Three Months Ended September 30, 2022

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
63,719

$
(560)

$
—

$
41

$
63,200
Commercial and industrial

19,836

(1,002)

(3,096)

370

16,108
Construction and land development

4,996

(228)

—

—

4,768
1-4 family residential

5,554

1,049

(14)

23

6,612
Consumer

542

91

(149)

90

574
Broker-dealer

651

(130)

—

—

521
Total

$
95,298

$
(780)

$
(3,259)

$
524

$
91,783

and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three months ended March 31, 2024 were also impacted by net charge-offs of $4.3 million.

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Nine Months Ended September 30, 2022

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
59,354

$
3,762

$
—

$
84

$
63,200
Commercial and industrial

21,982

(1,681)

(6,197)

2,004

16,108
Construction and land development

4,674

94

—

—

4,768
1-4 family residential

4,589

2,014

(62)

71

6,612
Consumer

578

136

(361)

221

574
Broker-dealer

175

346

—

—

521
Total

$
91,352

$
4,671

$
(6,620)

$
2,380

$
91,783

Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended March 31, 2024	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	40,061	$	1,149	$	(1,647)	$	—	$	39,563
Owner occupied		28,114		614		—		9		28,737
Commercial and industrial		20,926		(1,733)		(2,983)		342		16,552
Construction and land development		12,102		(2,095)		—		1		10,008
1-4 family residential		9,461		(728)		—		11		8,744
Consumer		648		(60)		(81)		37		544
Broker-dealer		101		(18)		—		—		83
Total	$	111,413	$	(2,871)	$	(4,711)	$	400	$	104,231


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended March 31, 2023	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	39,247	$	(580)	$	—	$	—	$	38,667
Owner occupied		24,008		(188)		(977)		11		22,854
Commercial and industrial		16,035		(53)		(59)		692		16,615
Construction and land development		6,051		(52)		—		—		5,999
1-4 family residential		9,313		2,434		(73)		17		11,691
Consumer		554		39		(69)		39		563
Broker-dealer		234		731		—		—		965
Total	$	95,442	$	2,331	$	(1,178)	$	759	$	97,354

Unfunded Loan Commitments

The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied by the lifetime Probability of Default grade and Loss Given Default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Balance, beginning of period	$	7,992	$	6,931	$	7,784	$	5,880	$	8,876	$	7,784
Other noninterest expense		559		87		767		1,138		(580)		(979)
Balance, end of period	$	8,551	$	7,018	$	8,551	$	7,018	$	8,296	$	6,805

The ~~increase~~decrease in the reserve for unfunded commitments during each of the ~~nine~~three months ended ~~September 30, 2022 was due to increases in both loan expected loss rates~~March 31, 2024 and ~~available commitment balances. During the three and nine months ended September 30,~~ 2023 ~~the increases in the reserve for unfunded commitments~~ were primarily due to ~~increases~~decreases in both commitment balances and expected loss rates.

2624

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

7. Mortgage Servicing Rights

The following tables present the changes in fair value of the Company’s MSR asset and other information related to the serviced portfolio (dollars in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
	2023		2022		2023			2022			2024			2023
Balance, beginning of period	$	95,101	$	121,688	$	100,825		$	86,990		$	96,662		$	100,825
Additions		3,759		29,340		23,859			47,850			3,312			13,210
Sales		—		—		(19,055)			(1,876)
Changes in fair value:
Due to changes in model inputs or assumptions ⁽¹⁾		7,373		7,942		2,834			32,035			(2,995)			(9,865)
Due to customer payoffs		(1,282)		(2,431)		(3,512)			(8,460)			(1,388)			(856)
Balance, end of period	$	104,951	$	156,539	$	104,951		$	156,539		$	95,591		$	103,314

					September 30,			December 31,			March 31,			December 31,
					2023			2022			2024			2023
Mortgage loans serviced for others ⁽²⁾					$	5,105,947		$	5,144,558		$	5,299,744		$	5,227,404
MSR asset as a percentage of serviced mortgage loans						2.06	%		1.96	%		1.80	%		1.85	%

(1)

Primarily represents normal customer payments, the impact of changes in interest rates, changes in discount rates and prepayment speed assumptions, and the refinement of other MSR model assumptions. Included in the three months ended March 31, 2024 are MSR asset fair value adjustments totaling $4.8 million, which reflect the difference between the MSR carrying value and the sales price reflected in a signed letter of intent (“LOI”), dated April 9, 2024, to sell certain MSR assets.

(2)

Represents unpaid principal balance of mortgage loans serviced for others.

The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows. The key assumptions noted in the table below represent the total $5.3 billion of serviced loan volume as of March 31, 2024, which includes $3.0 billion of serviced loan volume related to a signed LOI, dated April 9, 2024, to sell certain MSR assets.



	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Weighted average constant prepayment rate	7.30	%	8.14	%	8.53	%	8.65	%
Weighted average discount rate	11.70	%	12.10	%	13.02	%	11.67	%
Weighted average life (in years)	9.0		8.4		8.2		8.2

A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands). The sensitivity analysis of the fair value of the Company’s MSR asset as presented in the table below excludes $3.0 billion of serviced loan volume related to previously noted LOI to sell certain MSR assets, as the loan volume would not impact the projected future changes in the assumptions.


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Constant prepayment rate:
Impact of 10% adverse change	$	(3,207)	$	(3,288)	$	(1,617)	$	(3,511)
Impact of 20% adverse change		(6,227)		(6,375)		(3,139)		(6,796)
Discount rate:
Impact of 10% adverse change		(5,100)		(4,797)		(2,437)		(4,474)
Impact of 20% adverse change		(9,718)		(9,147)		(4,635)		(8,537)

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Contractually specified servicing fees, late fees and ancillary fees earned of ~~$8.5~~$8.2 million and ~~$9.9~~$7.4 million during the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $24.2 million and $27.3 million during the nine months ended September 30, 2023 and 2022,~~ respectively, were included in net gains from sale of loans and other mortgage production income within the consolidated statements of operations.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

8. Deposits

Deposits are summarized as follows (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Noninterest-bearing demand	$	3,200,247	$	3,968,862	$	3,028,543	$	3,007,101
Interest-bearing:
Demand accounts		4,406,393		4,110,418		4,236,334		4,496,682
Brokered - demand		308,513		5,336		155,478		156,692
Money market		1,739,708		2,045,554		2,004,883		1,869,809
Brokered - money market		7,376		9,031		10,086		8,828
Savings		264,111		312,140		255,223		259,745
Time		1,084,276		864,408		1,193,549		1,221,935
Brokered - time		92,473		—		—		42,400
	$	11,103,097	$	11,315,749	$	10,884,096	$	11,063,192

At ~~September 30, 2023,~~March 31, 2024, remaining maturities of estimated uninsured time deposits greater than $250,000 were ~~$432.5~~$544.5 million.

9. Short-term Borrowings

Short-term borrowings are summarized as follows (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Federal funds purchased	$	447,858	$	397,108	$	442,808	$	459,658
Securities sold under agreements to repurchase		226,812		297,856		228,645		240,050
Federal Home Loan Bank		—		—		—		—
Short-term bank loans		—		57,500		—		—
Commercial paper		208,329		217,592		221,121		200,330
	$	882,999	$	970,056	$	892,574	$	900,038

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase generally mature one to ninety days from the transaction date, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.

2826

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).


	Nine Months Ended September 30,						Three Months Ended March 31,
	2023			2022			2024			2023
Average balance during the period	$	797,489		$	530,180		$	770,705		$	706,400
Average interest rate during the period		5.40	%		1.36	%		5.50	%		4.81	%

	September 30,			December 31,			March 31,			December 31,
	2023			2022			2024			2023
Average interest rate at end of period		5.56	%		4.37	%		5.59	%		5.60	%
Securities underlying the agreements at end of period:
Carrying value	$	226,846		$	296,075		$	227,815		$	239,103
Estimated fair value	$	243,825		$	318,409		$	256,770		$	262,408

Federal Home Loan Bank (“FHLB”)

FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB short-term borrowings is shown in the following table (dollars in thousands).


	Nine Months Ended September 30,						Three Months Ended March 31,
	2023			2022			2024			2023
Average balance during the period	$	180,861		$	—		$	—		$	146,667
Average interest rate during the period		5.08	%		—	%		5.71	%		5.02	%

	September 30,			December 31,
	2023			2022
Average interest rate at end of period		—	%		—	%

Short-Term Bank Loans

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents and underwriting activities. Interest on the borrowings varies with the federal funds rate. At ~~September 30, 2023~~March 31, 2024 there were no outstanding short-term bank loans.

Commercial Paper

Hilltop Securities uses the net proceeds (after deducting related issuance expenses) from the sale of two commercial paper programs for general corporate purposes, including working capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under two separate programs, Series 2019-1 CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of ~~September 30, 2023,~~March 31, 2024, the weighted average maturity of the CP Notes was ~~133~~139 days at a rate of ~~6.22%~~6.15%, with a weighted average remaining life of 6579 days. At ~~September 30, 2023,~~March 31, 2024, the aggregate amount outstanding under these secured arrangements was ~~$208.3~~$221.1 million, which was collateralized by securities held for Hilltop Securities accounts valued at ~~$231.7~~$245.7 million.

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10. Notes Payable

Notes payable consisted of the following (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Senior Notes due April 2025, net of discount of $552 and $699, respectively	$	149,448	$	149,301
Subordinated Notes due May 2030, net of discount of $536 and $610, respectively		49,464		49,390
Subordinated Notes due May 2035, net of discount of $1,892 and $2,037, respectively		148,108		147,963
Senior Notes due April 2025, net of discount of $451 and $502, respectively					$	149,549	$	149,498
Subordinated Notes due May 2030, net of discount of $485 and $511, respectively						49,515		49,489
Subordinated Notes due May 2035, net of discount of $1,791 and $1,842, respectively						148,209		148,158
	$	347,020	$	346,654	$	347,273	$	347,145

11. Leases

Supplemental balance sheet information related to finance leases is as follows (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023			2022	2024		2023
Finance leases:
Premises and equipment	$	7,780	$	7,780	$	7,780	$	7,780
Accumulated depreciation		(6,390)		(5,948)		(6,685)		(6,537)
Premises and equipment, net	$	1,390	$	1,832	$	1,095	$	1,243

The components of lease costs, including short-term lease costs, are as follows (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Operating lease cost	$	8,488	$	9,121	$	26,231	$	28,078	$	8,560	$	8,729
Less operating lease and sublease income		(655)		(633)		(1,965)		(1,762)		(681)		(633)
Net operating lease cost	$	7,833	$	8,488	$	24,266	$	26,316	$	7,879	$	8,096

Finance lease cost:
Amortization of ROU assets	$	147	$	147	$	442	$	442	$	147	$	147
Interest on lease liabilities		104		118		324		363		95		112
Total finance lease cost	$	251	$	265	$	766	$	805	$	242	$	259

Supplemental cash flow information related to leases is as follows (in thousands).


	Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,899	$	27,387	$	9,308	$	10,024
Operating cash flows from finance leases		326		366		97		113
Financing cash flows from finance leases		628		563		229		199
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	11,396	$	12,336	$	13,400	$	4,924
Finance leases		—		—		—		—

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Information regarding the lease terms and discount rates of the Company’s leases is as follows.


	September 30, 2023			December 31, 2022			March 31, 2024			December 31, 2023
	Weighted Average			Weighted Average			Weighted Average			Weighted Average
	Remaining Lease	Weighted Average		Remaining Lease	Weighted Average		Remaining Lease	Weighted Average		Remaining Lease	Weighted Average
Lease Classification	Term (Years)	Discount Rate		Term (Years)	Discount Rate		Term (Years)	Discount Rate		Term (Years)	Discount Rate
Operating	5.4	4.48	%	5.7	3.89	%	5.4	5.19	%	5.3	4.59	%
Finance	3.4	4.95	%	4.0	4.89	%	3.1	5.02	%	3.3	4.98	%

Future minimum lease payments under lease agreements as of ~~September 30, 2023,~~March 31, 2024, are presented below (in thousands).


	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2023	$	8,530	$	325
2024		29,882		1,163	$	23,323	$	838
2025		23,898		886		27,935		886
2026		18,833		813		22,124		813
2027		14,987		448		17,433		448
2028						13,246		149
Thereafter		32,115		149		26,781		—
Total minimum lease payments		128,245		3,784		130,842		3,134
Less amount representing interest		(13,911)		(1,009)		(16,324)		(815)
Lease liabilities	$	114,334	$	2,775	$	114,518	$	2,319

As of ~~September 30, 2023,~~March 31, 2024, the Company had an additional operating ~~lease~~leases that ~~has~~have not yet commenced with aggregate future minimum lease payments of approximately ~~$2.2~~$0.2 million. ~~This~~These operating ~~lease is~~leases are expected to commence in ~~March~~May 2024 with a lease ~~term~~terms of ~~two~~three years.

12. Income Taxes

The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company’s effective tax rates were ~~25.2%~~22.5% and ~~21.8%~~11.6% for the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and 21.6% and 22.7% for the nine months ended September 30, 2023 and 2022,~~ respectively. The effective tax rate during the three months ended ~~September 30,~~March 31, 2023 was ~~higher~~lower than the applicable statutory rate primarily due to the impact of non-deductible compensation expense and other permanent adjustments. During the nine months ended September 30, 2023, the effective tax rate differs from the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax reserves, partially offset by nondeductible expenses. During the three months ended March 31, 2024, the effective tax rate was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by the ~~booking~~discrete impact of ~~additional taxes from a recent change~~restricted stock vesting during the quarter and investments in ~~the source of funding for an acquired non-qualified, deferred compensation plan.~~tax-exempt instruments.

13. Commitments and Contingencies

Legal Matters

The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, the Company does not take into account the availability of insurance coverage. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts accrued, the Company is required to make a disclosure of

~~Table of Contents~~

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~~(Unaudited)~~

the aggregate estimation. As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.

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(Unaudited)

Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company’s consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could result in additional expenses and collateral costs, including reputational damage.

On March 25, 2024, the Hilltop Broker-Dealers voluntarily reported to the SEC that off-channel communications may have occurred. Hilltop Securities currently is conducting that review.

On June 8, 2022, WR Investments, LP (“WR”) filed claims against Hilltop Securities, et al. through FINRA Dispute Resolution, Midwest Region. WR alleges it suffered a $13.0 million loss in its sale of subordinated bonds related to a portfolio of senior living facilities sold by an affiliate of WR. Hilltop Securities believes the claims are without merit and intends to vigorously defend against such claims. There can be no assurance, however, that Hilltop Securities will be successful. At present, Hilltop Securities is unable to estimate the probability or amount of potential losses, if any, related to these claims.

In September 2020, PrimeLending received an investigative inquiry from the United States Attorney for the Western District of Virginia regarding PrimeLending’s float down option. The United States Attorney has issued grand jury subpoenas to PrimeLending and PlainsCapital Bank for additional materials regarding this matter. PrimeLending has, and PrimeLending and PlainsCapital Bank will, cooperate with requests for information with respect to this matter.

While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not, except related to specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any matter, including the matters discussed above, could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Indemnification Liability Reserve

The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant against loss. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

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Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.

An additional reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim inquiries, claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests.

While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

At ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the mortgage origination segment’s indemnification liability reserve totaled ~~$13.6~~$9.8 million and ~~$20.5~~$11.7 million, respectively. The provision for indemnification losses was ~~$0.5~~$0.3 million ~~and $0.1 million~~ during both the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $1.3 million and $1.3 million during the nine months ended September 30, 2023 and 2022,~~ respectively.

The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).


	Representation and Warranty Specific Claims								Representation and Warranty Specific Claims
	Activity - Origination Loan Balance								Activity - Origination Loan Balance
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Balance, beginning of period	$	27,567	$	28,715	$	31,244	$	31,407	$	26,909	$	31,244
Claims made		6,572		14,247		37,582		42,305		10,309		14,415
Claims resolved with no payment		(1,633)		(4,378)		(11,418)		(12,352)		(6,469)		(5,548)
Repurchases		(4,430)		(11,320)		(25,430)		(34,096)		(6,784)		(9,908)
Indemnification payments		(386)		—		(4,288)		—		(486)		(3,006)
Balance, end of period	$	27,690	$	27,264	$	27,690	$	27,264	$	23,479	$	27,197

	Indemnification Liability Reserve Activity								Indemnification Liability Reserve Activity
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Balance, beginning of period	$	15,058	$	23,750	$	20,528	$	27,424	$	11,691	$	20,528
Additions for new sales		480		608		1,317		2,123		335		347
Repurchases		(1,896)		(1,591)		(7,781)		(6,367)		(1,856)		(2,360)
Early payment defaults		(65)		(90)		(295)		(212)		(320)		(98)
Indemnification payments		(27)		—		(219)		—		(79)		(147)
Change in reserves for loans sold in prior years		—		(553)		—		(844)		—		—
Balance, end of period	$	13,550	$	22,124	$	13,550	$	22,124	$	9,771	$	18,270

	September 30,		December 31,						March 31,		December 31,
	2023		2022						2024		2023
Reserve for Indemnification Liability:
Specific claims	$	1,109	$	627					$	928	$	951
Incurred but not reported claims		12,441		19,901						8,843		10,740
Total	$	13,550	$	20,528					$	9,771	$	11,691

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14. Financial Instruments with Off-Balance Sheet Risk

Banking

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

In the aggregate, the Bank had outstanding unused commitments to extend credit of ~~$2.2~~$2.1 billion at ~~September 30, 2023~~March 31, 2024 and outstanding financial and performance standby letters of credit of ~~$49.5~~$61.8 million at ~~September 30, 2023.~~March 31, 2024.

The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans held for investment. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

Broker-Dealer

In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients and to hedge changes in the fair value of certain securities, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

15. Stock-Based Compensation

~~Since 2012,~~During the ~~Company has issued stock-based incentive awards~~three months ended March 31, 2024 and 2023, Hilltop granted 3,968 and 5,101 shares of common stock, respectively, pursuant to ~~the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”). In July 2020, pursuant to stockholders’ approval, the Company adopted~~ the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”)~~. The 2020 Plan serves as successor to the 2012 Plan.~~

~~During the nine months ended September 30, 2023 and 2022, Hilltop granted 14,440 and 16,501 shares of common stock, respectively, pursuant to the 2020 Equity Plan~~ to certain non-employee members of the Company’s board of directors for services rendered to the Company.

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Restricted Stock Units

The following table summarizes information about stock-based incentive awards issued pursuant to the 2020 Equity Plan and nonvested restricted stock unit (“RSU”) activity for the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 (shares in thousands).


		RSUs				RSUs
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
		Outstanding	Fair Value			Outstanding	Fair Value
Balance, December 31, 2022		1,548	$	28.09
Balance, December 31, 2023					Balance, December 31, 2023	1,252	$	34.10
	Granted	479	$	34.36	Granted	512	$	30.53
	Vested/Released	(751)	$	21.93	Vested/Released	(519)	$	33.01
	Forfeited	(16)	$	31.57	Forfeited	(2)	$	32.57
Balance, September 30, 2023		1,260	$	34.03
Balance, March 31, 2024					Balance, March 31, 2024	1,243	$	33.09

Vested/Released RSUs include an aggregate of ~~134,731~~89,302 shares withheld to satisfy employee statutory tax obligations during the ~~nine~~three months ended ~~September 30, 2023.~~March 31, 2024.

During the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of ~~386,850~~415,405 RSUs pursuant to the 2020 Equity Plan. Of the RSUs granted during the ~~nine~~three months ended ~~September 30, 2023, 292,262~~March 31, 2024, 310,690 that were outstanding at ~~September 30, 2023,~~March 31, 2024, are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date. Of the RSUs granted during the ~~nine~~three months ended ~~September 30, 2023, 88,073~~March 31, 2024, 103,995 that were outstanding at ~~September 30, 2023~~March 31, 2024, provide for cliff vesting based upon the achievement of certain performance goals over a three-year period.

At ~~September 30, 2023,~~March 31, 2024, in the aggregate, ~~886,096~~915,509 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and ~~374,299~~327,626 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At ~~September 30, 2023~~March 31, 2024, unrecognized compensation expense related to outstanding RSUs of ~~$18.5~~$22.5 million is expected to be recognized over a weighted average period of ~~1.35~~1.84 years.

16. Regulatory Matters

Banking and Hilltop

PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy and compliance with the Basel III regulatory capital requirements as implemented by the Board of Governors of the Federal Reserve System. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.

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The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including conservation buffer ratio in effect at the end of the period (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of ~~September 30, 2023~~March 31, 2024 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary ~~period.~~period through December 31, 2024.


									Minimum												Minimum
									Capital												Capital
									Requirements												Requirements
									Including												Including
									Conservation		To Be Well										Conservation		To Be Well
	September 30, 2023				December 31, 2022				Buffer		Capitalized		March 31, 2024				December 31, 2023				Buffer		Capitalized
	Amount		Ratio		Amount		Ratio		Ratio		Ratio		Amount		Ratio		Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,438,971	10.62	%	$	1,405,164	10.26	%	4.0	%	5.0	%	$	1,430,850	11.00	%	$	1,407,660	10.55	%	4.0	%	5.0	%
Hilltop		1,954,422	11.92	%		1,900,701	11.47	%	4.0	%	N/A			1,980,114	12.49	%		1,974,918	12.23	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,438,971	15.31	%		1,405,164	14.98	%	7.0	%	6.5	%		1,430,850	15.87	%		1,407,660	15.44	%	7.0	%	6.5	%
Hilltop		1,954,422	18.60	%		1,900,701	18.23	%	7.0	%	N/A			1,980,114	19.73	%		1,974,918	19.32	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,438,971	15.31	%		1,405,164	14.98	%	8.5	%	8.0	%		1,430,850	15.87	%		1,407,660	15.44	%	8.5	%	8.0	%
Hilltop		1,954,422	18.60	%		1,900,701	18.23	%	8.5	%	N/A			1,980,114	19.73	%		1,974,918	19.32	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,546,036	16.45	%		1,492,576	15.91	%	10.5	%	10.0	%		1,538,101	17.06	%		1,511,239	16.58	%	10.5	%	10.0	%
Hilltop		2,262,945	21.54	%		2,187,652	20.98	%	10.5	%	N/A			2,287,216	22.79	%		2,284,357	22.34	%	10.5	%	N/A

Broker-Dealer

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Hilltop Securities has elected to determine its net capital requirements using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $1,000,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of the aggregate debit items. Momentum Independent Network follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the maintenance of the larger of $250,000 or 6-2/3% of aggregate indebtedness.

At ~~September 30, 2023,~~March 31, 2024, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).


				Momentum					Momentum
	Hilltop			Independent		Hilltop			Independent
	Securities			Network		Securities			Network
Net capital	$	233,291		$	4,602	$	278,638		$	4,477
Less: required net capital		7,109			250		6,225			250
Excess net capital	$	226,182		$	4,352	$	272,413		$	4,227

Net capital as a percentage of aggregate debit items		65.6	%				89.5	%
Net capital in excess of 5% aggregate debit items	$	215,518				$	263,076

Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated for regulatory purposes under the provisions of the Exchange Act are restricted and not available for general corporate purposes. At ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the Hilltop Broker-Dealers held cash of ~~$47.5~~$70.7 million and ~~$67.7~~$57.4 million,

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at ~~September 30, 2023.~~March 31, 2024.

Mortgage Origination

As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum capital, net worth and liquidity requirements established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial statements to HUD and GNMA ~~as applicable,~~ documenting their respective compliance with minimum capital, net worth and liquidity ~~requirements.~~requirements, including timely reporting if a quarter’s operating loss exceeds more than 20% of its previous quarter or year-end net worth (“the operating loss ratio”) and/or if a quarter’s capital ratio is below 6% (“the GNMA capital ratio”). If this occurs, certain additional financial reporting submissions are required. As of ~~September 30, 2023,~~March 31, 2024, PrimeLending and its subsidiaries’ operating loss ratio was 22.6%. As of March 31, 2024, PrimeLending failed the GNMA minimum capital ratio requirement of 6% with a ratio of 5.56%. These trends have been reported to HUD and GNMA. As of March 31, 2024, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.

17. Stockholders’ Equity

Dividends

During the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022,~~ the Company declared and paid cash dividends of ~~$0.48~~$0.17 and ~~$0.45~~$0.16 per common share, or an aggregate of ~~$31.2~~$11.1 million and ~~$33.5~~$10.4 million, respectively.

On ~~October 19, 2023,~~April 18, 2024, Hilltop’s board of directors declared a quarterly cash dividend of ~~$0.16~~$0.17 per common share, payable on ~~November 28, 2023,~~May 24, 2024, to all common stockholders of record as of the close of business on ~~November 13, 2023.~~May 10, 2024.

Stock Repurchases

In January ~~2023,~~2024, the Hilltop board of directors authorized a new stock repurchase program through January ~~2024,~~2025, pursuant to which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, Hilltop paid ~~$4.5~~$9.9 million to repurchase an aggregate of ~~144,403~~320,042 shares of our common stock at an average price of ~~$31.15~~$31.04 per share pursuant to the stock repurchase program.

The Company’s stock repurchase program, prior year repurchases, and related accounting policy are discussed in detail in Note 1 and Note 2322 to the consolidated financial statements included in the Company’s ~~2022~~2023 Form 10-K.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

18. Derivative Financial Instruments

The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse impacts from changes in interest rates on the Bank’s net interest margin. Additionally, the Bank manages variability of cash flows associated with its variable rate debt in interest-related cash outflows with interest rate swap contracts. PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”) and futures contracts. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including ~~interest rate swaps and~~ U.S. Treasury bond futures and options to hedge this risk. The Hilltop Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions. Additionally, Hilltop Securities uses various derivative instruments, including U.S. Treasury bond futures and options, futures contracts, credit default swaps and municipal market data (“MMD”) rate locks, to hedge changes in the fair value of its securities.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Non-Hedging Derivative Instruments and the Fair Value Option

As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production income. These changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 7 to the consolidated financial statements. The fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as appropriate. Changes in the fair value of derivatives are presented in the following table (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Increase (decrease) in fair value of derivatives during period:
PrimeLending	$	(946)	$	2,276	$	5,840	$	(10,975)	$	10,626	$	4,897
Hilltop Broker-Dealers		13,214		14,240		(4,016)		23,819		(3,945)		(21,180)
Bank		92		7		76		53		(11)		(12)

Hedging Derivative Instruments

The Company has entered into interest rate swap contracts to manage the exposure to changes in fair value associated with certain available for sale fixed rate collateralized mortgage-backed securities and fixed rate loans held for investment attributable to changes in the designated benchmark interest rate. Certain of these fair value hedges have been designated as a portfolio layer, which provides the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. Additionally, the Company has outstanding interest rate swap contracts designated as cash flow hedges and utilized to manage the variability of cash flows associated with its variable rate borrowings.

Under each of its interest rate swap contracts designated as cash flow hedges, the Company receives a floating rate and pays a fixed rate on the outstanding notional amount. The Company assesses the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the derivative instruments are

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

highly effective in offsetting the variability of the hedged cash flows or fair value, changes in the fair value of the derivatives designated as hedges of cash flows are included as a component of accumulated other comprehensive income or loss on ~~our~~the Company’s consolidated balance sheets and changes in the fair value of the derivatives designated as hedges of fair value are included in current earnings. Although the Company has determined at the onset of the hedges that the derivative instruments will be highly effective hedges throughout the term of the contract, any portion of derivative instruments subsequently determined to be ineffective will be recognized in earnings.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Derivative positions are presented in the following table (in thousands).


	September 30, 2023				December 31, 2022				March 31, 2024				December 31, 2023
	Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Derivative instruments (not designated as hedges):
IRLCs	$	621,604	$	2,752	$	506,278	$	1,767	$	622,902	$	9,999	$	383,767	$	7,734
Commitments to purchase MBSs		2,283,755		(16,834)		819,681		2,435		974,248		4,000		1,470,142		15,666
Commitments to sell MBSs		3,074,491		31,497		2,188,964		10,711		1,917,326		(2,134)		2,222,225		(17,870)
Interest rate swaps		46,500		4,334		35,784		(1,421)		54,500		(286)		33,500		(5,349)
Interest rate swaps back-to-back (asset) ⁽¹⁾		1,421		120		—		—		1,421		99		1,421		176
Interest rate swaps back-to-back (liability) ⁽¹⁾		1,421		(124)		—		—		1,421		(102)		1,421		(191)
U.S. Treasury bond futures and options ⁽²⁾		338,600		(3,883)		395,500		(449)		292,900		43		306,200		430
Interest rate and other futures ⁽²⁾		399,200		—		2,612,000		—		264,200		—		224,800		—
Credit default swaps		4,000		2		3,000		(2)		16,000		(12)		—		—
Warrants										791		820		866		820

Derivative instruments (designated as hedges):
Interest rate swaps designated as cash flow hedges	$	410,000	$	21,447	$	430,000	$	21,703	$	355,000	$	14,676	$	410,000	$	14,277
Interest rate swaps designated as fair value hedges ⁽³⁾		325,272		49,315		365,323		42,828		325,113		39,817		325,193		34,799

(1)

Noted derivative instruments include both customer-facing derivatives as well as offsetting derivatives facing other dealer banks. The fair value of these derivatives include a net credit valuation adjustment that was nominal at ~~September 30,~~March 31, 2024 and December 31, 2023, respectively, reducing the fair value of the liability.

(2)	Noted derivative instruments include contracts between the Hilltop Broker-Dealers and PrimeLending and their respective counterparties with changes in fair value of the contracts that are settled daily.

(3)

The Company designated $325.3 million and ~~$365.3~~$325.3 million as the hedged amount (from a closed portfolio of prepayable available for sale securities and loans held for investment with a carrying value of ~~$275.8~~$285.1 million and ~~$322.5~~$290.2 million as of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively), of which, a subset of these hedges are in portfolio layer hedging relationships. The cumulative basis adjustment included in the carrying value of the hedged items totaled ~~$49.5~~$40.0 million and ~~$42.8~~$35.0 million as of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively.

The Bank and PrimeLending held aggregate cash collateral advances ~~in other liabilities within the consolidated balance sheets,~~ of ~~$86.1~~$57.4 million and ~~$65.0~~$51.8 million to offset net asset derivative positions on its commitments to sell MBSs and derivative instruments designated as hedges at ~~September 30, 2023~~March 31, 2024 and December, 31, ~~2022,~~2023, respectively. PrimeLending had advanced cash collateral totaling ~~$0.1~~$0.8 million and ~~$8.4~~$14.7 million to offset net liability positions on its commitments to sell MBSs at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively. In addition, PrimeLending and the Hilltop Broker-Dealers had advanced cash collateral totaling ~~$13.4~~$8.2 million and ~~$10.6~~$7.6 million on various derivative instruments at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively. ~~The advanced~~These cash collateral amounts are included in either other assets or other liabilities within the consolidated balance sheets.

Derivatives on Behalf of Customers

The Bank offers derivative contracts to certain customers in connection with their risk management needs. These derivatives include back-to-back interest rate swaps. The Bank manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer bank. These derivatives generally work together as an economic interest rate hedge, but the Bank does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes in fair value occurred, typically resulting in no net earnings impact.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

19. Balance Sheet Offsetting

Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company’s accounting policy is to present required disclosures related to collateral and derivative positions on a gross basis.

The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).


							Gross Amounts Not Offset in												Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet										Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Assets				Cash				Gross Amounts		Gross Amounts		of Assets				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net		of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount		Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
September 30, 2023
Securities borrowed:
Institutional counterparties	$	1,368,945	$	—	$	1,368,945	$	(1,308,458)	$	—	$	60,487

Interest rate swaps:
Institutional counterparties		75,216		—		75,216		(4,334)		(73,650)		(2,768)

Credit default swaps:
Institutional counterparties		2		—		2		(2)		—		—

Reverse repurchase agreements:
Institutional counterparties		123,719		—		123,719		(120,140)		—		3,579

Forward MBS derivatives:
Institutional counterparties		33,379		(482)		32,897		(21,280)		(12,337)		(720)
	$	1,601,261	$	(482)	$	1,600,779	$	(1,454,214)	$	(85,987)	$	60,578
December 31, 2022
March 31, 2024
Securities borrowed:
Institutional counterparties	$	1,012,573	$	—	$	1,012,573	$	(964,517)	$	—	$	48,056	$	1,398,644	$	—	$	1,398,644	$	(1,336,220)	$	—	$	62,424

Interest rate swaps:
Institutional counterparties		64,729		—		64,729		—		(64,630)		99		54,725		—		54,725		—		(54,592)		133

Reverse repurchase agreements:
Institutional counterparties		118,070		—		118,070		(115,302)		—		2,768		91,608		—		91,608		(91,515)		—		93

Forward MBS derivatives:
Institutional counterparties		16,694		(3,410)		13,284		(9,957)		—		3,327		5,344		—		5,344		(583)		—		4,761

Treasury futures and options derivatives:
Institutional counterparties		57		(506)		(449)		—		—		(449)		43		—		43		—		—		43
	$	1,212,123	$	(3,916)	$	1,208,207	$	(1,089,776)	$	(64,630)	$	53,801	$	1,550,364	$	—	$	1,550,364	$	(1,428,318)	$	(54,592)	$	67,454
December 31, 2023
Securities borrowed:
Institutional counterparties													$	1,406,937	$	—	$	1,406,937	$	(1,332,856)	$	—	$	74,081

Interest rate swaps:
Institutional counterparties														49,253		—		49,253		—		(49,253)		—

Reverse repurchase agreements:
Institutional counterparties														80,011		—		80,011		(80,011)		—		—

Forward MBS derivatives:
Institutional counterparties														16,755		—		16,755		(194)		—		16,561

Treasury futures and options derivatives:
Institutional counterparties														430		—		430		—		—		430
													$	1,553,386	$	—	$	1,553,386	$	(1,413,061)	$	(49,253)	$	91,072

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

Gross Amounts Not Offset in

Net Amounts

the Balance Sheet


Gross Amounts

Gross Amounts

of Liabilities




Cash



of Recognized

Offset in the

Presented in the

Financial

Collateral

Net

Liabilities

Balance Sheet

Balance Sheet

Instruments

Pledged

Amount
September 30, 2023

Securities loaned:

Institutional counterparties

$
1,304,884

$
—

$
1,304,884

$
(1,245,860)

$
—

$
59,024

Repurchase agreements:

Institutional counterparties

226,061

—

226,061

(226,061)

—

—

Forward MBS derivatives:

Institutional counterparties

18,234

—

18,234

(18,234)

—

—

Treasury futures and options derivatives:

Institutional counterparties

3,891

(8)

3,883

—

(6,790)

(2,907)

$
1,553,070

$
(8)

$
1,553,062

$
(1,490,155)

$
(6,790)

$
56,117
December 31, 2022

Securities loaned:

Institutional counterparties

$
916,570

$
—

$
916,570

$
(871,037)

$
—

$
45,533

Interest rate swaps:

Institutional counterparties

1,619

—

1,619

(1,438)

—

181

Credit default swaps:

Institutional counterparties

2

—

2

(2)

—

—

Repurchase agreements:

Institutional counterparties

296,978

—

296,978

(319,897)

—

(22,919)

Forward MBS derivatives:

Institutional counterparties

138

—

138

(138)

—

—

$
1,215,307

$
—

$
1,215,307

$
(1,192,512)

$
—

$
22,795


							Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Liabilities				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
March 31, 2024
Securities loaned:
Institutional counterparties	$	1,366,956	$	—	$	1,366,956	$	(1,302,924)	$	—	$	64,032

Interest rate swaps:
Institutional counterparties		419		—		419		—		—		419

Credit default swaps:
Institutional counterparties		12		—		12		—		—		12

Repurchase agreements:
Institutional counterparties		227,815		—		227,815		(227,815)		—		—

Forward MBS derivatives:
Institutional counterparties		3,478		—		3,478		(583)		(785)		2,110
	$	1,598,680	$	—	$	1,598,680	$	(1,531,322)	$	(785)	$	66,573
December 31, 2023
Securities loaned:
Institutional counterparties	$	1,371,896	$	—	$	1,371,896	$	(1,296,828)	$	—	$	75,068

Interest rate swaps:
Institutional counterparties		5,349		—		5,349		(5,349)		—		—

Repurchase agreements:
Institutional counterparties		239,103		—		239,103		(239,103)		—		—

Forward MBS derivatives:
Institutional counterparties		18,958		—		18,958		(194)		(10,515)		8,249
	$	1,635,306	$	—	$	1,635,306	$	(1,541,474)	$	(10,515)	$	83,317

Secured Borrowing Arrangements

Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under repurchase agreements, which are secured borrowings and generally mature one to ninety days from the transaction date or involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities, which is monitored on a daily basis.

Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date and as a conduit for financing activities.

When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to perform or if collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the customer.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present the remaining contractual maturities of repurchase agreement and securities lending transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity transactions outstanding at both ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023.


		Remaining Contractual Maturities											Remaining Contractual Maturities
		Overnight and						Greater Than					Overnight and						Greater Than
September 30, 2023		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
March 31, 2024													Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. government agency securities		$	8,729	$	4,494	$	—	$	—	$	13,223
Asset-backed securities			93,895		62,336		8,599		48,008		212,838		$	118,386	$	109,429	$	—	$	—	$	227,815

Securities lending transactions:
Corporate securities			113		—		—		—		113			52		—		—		—		52
Equity securities			1,304,771		—		—		—		1,304,771			1,366,904		—		—		—		1,366,904
Total		$	1,407,508	$	66,830	$	8,599	$	48,008	$	1,530,945		$	1,485,342	$	109,429	$	—	$	—	$	1,594,771

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,530,945	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,594,771
Amount related to agreements not included in offsetting disclosure above										$	—										$	—

		Remaining Contractual Maturities											Remaining Contractual Maturities
		Overnight and						Greater Than					Overnight and						Greater Than
December 31, 2022		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
December 31, 2023													Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. Treasury and agency securities													$	8,389	$	—	$	—	$	—	$	8,389
Asset-backed securities		$	130,616	$	2,539	$	141,461	$	22,362	$	296,978			81,419		149,295		—		—		230,714

Securities lending transactions:
Corporate securities			113		—		—		—		113			52		—		—		—		52
Equity securities			916,457		—		—		—		916,457			1,371,844		—		—		—		1,371,844
Total		$	1,047,186	$	2,539	$	141,461	$	22,362	$	1,213,548		$	1,461,704	$	149,295	$	—	$	—	$	1,610,999

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,213,548	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,610,999
Amount related to agreements not included in offsetting disclosure above										$	—										$	—

20. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Receivables:
Securities borrowed	$	1,368,945	$	1,012,573	$	1,398,644	$	1,406,937
Securities failed to deliver		12,422		11,350		42,581		28,120
Trades in process of settlement		67,270		3,476		16,782		123,722
Other		11,715		10,656		15,554		15,152
	$	1,460,352	$	1,038,055	$	1,473,561	$	1,573,931
Payables:
Securities loaned	$	1,304,884	$	916,570	$	1,366,956	$	1,371,896
Correspondents		19,471		22,760		17,390		33,286
Securities failed to receive		36,970		20,167		43,974		18,135
Other		6,739		6,973		8,142		7,417
	$	1,368,064	$	966,470	$	1,436,462	$	1,430,734

21. Segment and Related Information

The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s business units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. These segments reflect the manner in which operations are managed and the criteria used by the chief operating decision maker, the Company’s President and Chief Executive Officer, to evaluate segment performance, develop strategy and allocate resources.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

~~21. Segment and Related Information~~

The banking segment includes the operations of the Bank. The broker-dealer segment includes the operations of Securities Holdings and the mortgage origination segment is composed of PrimeLending.

Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about reportable business segment revenues, operating results, goodwill and assets (in thousands).


					Mortgage				All Other and		Hilltop						Mortgage				All Other and		Hilltop
Three Months Ended September 30, 2023	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Three Months Ended March 31, 2024													Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	99,047	$	12,215	$	(5,482)	$	(3,175)	$	13,045	$	115,650	$	91,606	$	12,269	$	(4,252)	$	(3,103)	$	7,101	$	103,621
Provision for (reversal of) credit losses		675		(715)		—		—		—		(40)		(2,853)		(18)		—		—		—		(2,871)
Noninterest income		11,668		106,488		88,747		3,159		(13,213)		196,849		11,903		104,578		66,700		5,785		(7,348)		181,618
Noninterest expense		56,887		97,865		91,505		13,937		(177)		260,017		56,020		97,947		78,898		17,384		(226)		250,023
Income (loss) before taxes	$	53,153	$	21,553	$	(8,240)	$	(13,953)	$	9	$	52,522	$	50,342	$	18,918	$	(16,450)	$	(14,702)	$	(21)	$	38,087

					Mortgage				All Other and		Hilltop
Nine Months Ended September 30, 2023	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	304,804	$	39,279	$	(15,590)	$	(9,976)	$	37,105	$	355,622
Provision for (reversal of) credit losses		17,175		(48)		—		—	��	—		17,127
Noninterest income		34,046		297,164		247,655		8,944		(37,815)		549,994
Noninterest expense		170,450		283,063		278,918		45,750		(717)		777,464
Income (loss) before taxes	$	151,225	$	53,428	$	(46,853)	$	(46,782)	$	7	$	111,025

					Mortgage				All Other and		Hilltop
Three Months Ended September 30, 2022	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	110,939	$	13,386	$	(2,939)	$	(3,276)	$	5,376	$	123,486
Provision for (reversal of) credit losses		(650)		(130)		—		—		—		(780)
Noninterest income		12,200		100,798		98,200		1,809		(6,032)		206,975
Noninterest expense		60,160		96,843		118,345		14,034		(644)		288,738
Income (loss) before taxes	$	63,629	$	17,471	$	(23,084)	$	(15,501)	$	(12)	$	42,503


					Mortgage				All Other and		Hilltop						Mortgage				All Other and		Hilltop
Nine Months Ended September 30, 2022	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Three Months Ended March 31, 2023													Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	304,269	$	37,481	$	(6,066)	$	(9,856)	$	9,705	$	335,533	$	104,770	$	13,863	$	(4,208)	$	(3,322)	$	10,602	$	121,705
Provision for (reversal of) credit losses		4,325		346		—		—		—		4,671		1,600		731		—		—		—		2,331
Noninterest income		37,438		249,139		381,477		5,655		(11,033)		662,676		11,190		90,635		68,829		2,704		(10,864)		162,494
Noninterest expense		175,921		268,307		386,372		44,388		(1,357)		873,631		56,127		90,345		88,753		15,513		(268)		250,470
Income (loss) before taxes	$	161,461	$	17,967	$	(10,961)	$	(48,589)	$	29	$	119,907	$	58,233	$	13,422	$	(24,132)	$	(16,131)	$	6	$	31,398


					Mortgage				All Other and		Hilltop						Mortgage				All Other and		Hilltop
	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated		Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
September 30, 2023
March 31, 2024
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	13,323,789	$	2,905,822	$	1,321,313	$	2,500,705	$	(3,654,771)	$	16,396,858	$	13,107,429	$	2,942,673	$	1,048,082	$	2,558,636	$	(3,447,187)	$	16,209,633

December 31, 2022
December 31, 2023
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	13,420,110	$	2,672,709	$	1,249,284	$	2,465,513	$	(3,548,334)	$	16,259,282	$	13,288,627	$	2,929,296	$	1,181,316	$	2,543,057	$	(3,475,300)	$	16,466,996

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

22. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Basic earnings per share:
Income attributable to Hilltop	$	37,042	$	32,068	$	80,975	$	87,578	$	27,668	$	25,800

Weighted average shares outstanding - basic		65,106		64,552		65,011		72,400		65,200		64,901

Basic earnings per common share:	$	0.57	$	0.50	$	1.25	$	1.21	$	0.42	$	0.40

Diluted earnings per share:
Income attributable to Hilltop	$	37,042	$	32,068	$	80,975	$	87,578	$	27,668	$	25,800

Weighted average shares outstanding - basic		65,106		64,552		65,011		72,400		65,200		64,901
Effect of potentially dilutive securities		2		117		3		157		14		53
Weighted average shares outstanding - diluted		65,108		64,669		65,014		72,557		65,214		64,954

Diluted earnings per common share:	$	0.57	$	0.50	$	1.25	$	1.21	$	0.42	$	0.40

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the financial information set forth in the tables herein.

Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum Independent Network” refer to Momentum Independent Network Inc. (a wholly owned subsidiary of Securities Holdings), Hilltop Securities and Momentum Independent Network are collectively referred to as the “Hilltop Broker-Dealers”, references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole.

FORWARD-LOOKING STATEMENTS

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our revenue, our liquidity and sources of funding, market trends, operations and business, taxes, the impact of natural disasters or public health emergencies, information technology expenses, cybersecurity incidents, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, total expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance for credit losses and provision for (reversal of) credit losses, expected future benchmark rates, anticipated investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans, ~~cybersecurity incidents~~ and the outcome of litigation are forward-looking statements.

These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:

●

the credit risks of lending activities, including our ability to estimate credit losses and the allowance for credit losses, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs;

●

effectiveness of our data security controls in the face of cyber attacks and any legal, reputational and financial risks following a cybersecurity incident;

●

changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil;

●

changes in the interest rate environment;

●

risks associated with concentration in real estate related loans;

●

the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by the indenture governing our indebtedness;

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●

disruptions to the economy and ~~the U.S. banking system caused by bank failures during early 2023,~~financial services industry, risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in the cost of our deposit insurance assessments;

●

cost and availability of capital;

●

changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

●

changes in key management;

●

competition in our banking, broker-dealer and mortgage origination segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders and government agencies;

●

legal and regulatory proceedings;

●

risks associated with merger and acquisition integration; and

●

our ability to use excess capital in an effective manner.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2022~~2023 (“~~2022~~2023 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on February ~~17, 2023,~~14, 2024, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.

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OVERVIEW

We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer and mortgage origination segments. The following includes additional details regarding the financial products and services provided by each of our primary business units.

PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment and treasury management services primarily in Texas and residential mortgage loans throughout the United States.

Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

The following historical consolidated data for the periods indicated has been derived from our historical consolidated financial statements included elsewhere in this Quarterly Report (dollars and shares in thousands, except per share data).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2023			2022			2023			2022			2024			2023
Statement of Operations Data:
Net interest income	$	115,650		$	123,486		$	355,622		$	335,533		$	103,621		$	121,705
Provision for (reversal of) credit losses		(40)			(780)			17,127			4,671			(2,871)			2,331
Total noninterest income		196,849			206,975			549,994			662,676			181,618			162,494
Total noninterest expense		260,017			288,738			777,464			873,631			250,023			250,470
Income before income taxes		52,522			42,503			111,025			119,907			38,087			31,398
Income tax expense		13,211			9,249			24,008			27,191			8,565			3,630
Net income		39,311			33,254			87,017			92,716			29,522			27,768
Less: Net income attributable to noncontrolling interest		2,269			1,186			6,042			5,138			1,854			1,968
Income attributable to Hilltop	$	37,042		$	32,068		$	80,975		$	87,578		$	27,668		$	25,800

Per Share Data:
Diluted earnings per common share	$	0.57		$	0.50		$	1.25		$	1.21		$	0.42		$	0.40
Diluted weighted average shares outstanding		65,108			64,669			65,014			72,557			65,214			64,954
Cash dividends declared per common share	$	0.16		$	0.15		$	0.48		$	0.45		$	0.17		$	0.16
Dividend payout ratio ⁽¹⁾		28.12	%		30.19	%		38.54	%		37.20	%		40.06	%		40.25	%
Book value per common share (end of period)							$	31.91		$	31.46		$	32.66		$	31.63
Tangible book value per common share ⁽²⁾(end of period)							$	27.67		$	27.13		$	28.44		$	27.36

							September 30,			December 31,			March 31,			December 31,
							2023			2022			2024			2023
Balance Sheet Data:
Total assets							$	16,396,858		$	16,259,282		$	16,209,633		$	16,466,996
Cash and due from banks								1,513,747			1,579,512			1,710,066			1,858,700
Securities								2,860,482			3,289,530			2,929,120			2,836,584
Loans held for sale								1,058,806			982,616			842,324			943,846
Loans held for investment, net of unearned income								8,204,052			8,092,673			8,062,693			8,079,745
Allowance for credit losses								(110,822)			(95,442)			(104,231)			(111,413)
Total deposits								11,103,097			11,315,749			10,884,096			11,063,192
Notes payable								347,020			346,654			347,273			347,145
Total stockholders' equity								2,106,862			2,063,529			2,159,430			2,150,329

Capital Ratios:
Common equity to assets ratio								12.68	%		12.53	%		13.15	%		12.89	%
Tangible common equity to tangible assets ⁽²⁾								11.18	%		11.00	%		11.65	%		11.41	%

(1) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.

(2) For a reconciliation to the nearest GAAP measure, see “—Reconciliation and Management’s Explanation of Non-GAAP Financial Measures.”

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Consolidated income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included the following contributions from our reportable business segments.

●

The banking segment contributed ~~$53.2 million and $151.2~~$50.3 million of income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2023;~~March 31, 2024;

●

The broker-dealer segment contributed ~~$21.6 million and $53.4~~$18.9 million of income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2023;~~March 31, 2024; and

●

The mortgage origination segment incurred ~~$8.2 million and $46.9~~$16.5 million of losses before income taxes during the three ~~and nine~~ months ended ~~September 30, 2023.~~March 31, 2024.

During the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, we declared and paid total common dividends of ~~$31.2~~$11.1 million.

On ~~October 19, 2023,~~April 18, 2024, our board of directors declared a quarterly cash dividend of ~~$0.16~~$0.17 per common share, payable on ~~November 28, 2023~~May 24, 2024 to all common stockholders of record as of the close of business on ~~November 13, 2023.~~May 10, 2024.

In January ~~2023,~~2024, our board of directors authorized a new stock repurchase program through January ~~2024,~~2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, we paid ~~$4.5~~$9.9 million to repurchase an aggregate of ~~144,403~~320,042 shares of our common stock at an average price of ~~$31.15~~$31.04 per share pursuant to the stock repurchase program.

Reconciliation and Management’s Explanation of Non-GAAP Financial Measures

We present certain measures in our selected financial data that are not measures of financial performance recognized by accounting principles generally accepted in the United States (“GAAP”). “Tangible book value per common share” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity to tangible assets” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and other intangible assets related to those transactions. You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures, “book value per common share” and “equity to total assets” (dollars in thousands, except per share data).


	September 30,						March 31,
	2023			2022			2024			2023
Book value per common share	$	31.91		$	31.46		$	32.66		$	31.63
Effect of goodwill and intangible assets per share		(4.24)			(4.33)			(4.22)			(4.27)
Tangible book value per common share	$	27.67		$	27.13		$	28.44		$	27.36

	September 30,			December 31,			March 31,			December 31,
	2023			2022			2024			2023
Hilltop stockholders’ equity	$	2,079,580		$	2,036,924		$	2,131,864		$	2,122,967
Less: goodwill and intangible assets, net		276,525			278,764			275,390			275,904
Tangible common equity	$	1,803,055		$	1,758,160		$	1,856,474		$	1,847,063

Total assets	$	16,396,858		$	16,259,282		$	16,209,633		$	16,466,996
Less: goodwill and intangible assets, net		276,525			278,764			275,390			275,904
Tangible assets	$	16,120,333		$	15,980,518		$	15,934,243		$	16,191,092

Equity to assets		12.68	%		12.53	%		13.15	%		12.89	%
Tangible common equity to tangible assets		11.18	%		11.00	%		11.65	%		11.41	%

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Recent Developments

Economic Environment

~~Beginning~~The impacts of economic headwinds that began in 2022, and continuing through the first nine months of 2023, our operational and financial results have been volatile due to economic headwinds including tight housing inventories on mortgage volumes, declining deposit balances, rapid increases in market interest rates and a volatile economic forecast. The impacts of such headwinds during the remainder of 2023continued into 2024, remain uncertain and will depend on several developments outside of our control including, among others, the timing and significance of further changes in U.S. treasury yields and mortgage interest rates, exposure to increasing funding costs, inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, and international armed conflicts and their impact on supply chains.

~~In addition,~~As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K, events in early 2023 relating to the failures of certain banking entities caused general uncertainty and concern regarding the liquidity adequacy of the banking sector ~~experienced increased uncertainty and concerns associated with liquidity positions primarily due to high-profile bank failures during early 2023~~ as ~~depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. As~~ a result, both regulatory scrutiny and market focus on liquidity increased. While immediate financial institution safety and soundness concerns have somewhat subsided, these failures underscore the importance of maintaining access to diverse sources of funding.

whole. In light of ~~the above~~these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During 2023, we ~~began increasing~~increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. ~~The~~Further, during the second quarter of 2023, we bolstered our liquidity position by increasing brokered deposits at the Bank ~~also accessed additional~~by approximately $390 million with a remaining balance of approximately $160 million at March 31, 2024, of which approximately $150 million matured in April 2024. Additionally, at March 31, 2024, we continued to access core deposits from our Hilltop Securities Federal Deposit Insurance Corporation (“FDIC”) insured sweep program, and utilized its Federal Home Loan Bank (“FHLB”) borrowing capacity through the use of short-term borrowings. Further, to bolster our liquidity position, we increased brokered deposits at the Bank by approximately $390 million during the second quarter of 2023. At September 30, 2023, we continued to access approximately $300 million of additional core deposits from our Hilltop Securities FDIC insured sweep program, while the Bank is not utilizing any of its ~~FHLB~~Federal Home Loan Bank (“FHLB”) borrowing capacity.

Market conditions and external factors may unpredictably impact the competitive landscape for deposits such as those experienced during the first quarter of 2023. Additionally, the ~~rising~~current market interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. An unexpected influx of withdrawals of deposits could adversely impact our ability to rely on organic deposits to primarily fund our operations, potentially requiring greater reliance on secondary sources of liquidity to meet ~~withdrawal~~withdrawals of deposits or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of investment securities and loans, federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, brokered time deposits, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. Refer to the discussions in the “Segment Results – Banking Segment” and “Liquidity and Capital Resources – Banking Segment” sections that follow for more details regarding the Bank’s deposits, available liquidity and borrowing capacity at ~~September 30, 2023.~~

As a result of the bank failures during early 2023 and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments, depending on the final rule. Additionally, on March 12, 2023, the Treasury Department, Federal Reserve and FDIC jointly announced the Bank Term Funding Program (“BTFP”). The BTFP aims to enhance liquidity by allowing institutions to pledge certain securities at par value, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties. The future impact of these failures on the economy, financial institutions and their depositors, as well as a governmental regulatory response or actions resulting from the same, is uncertain at this time. To date, we have not leveraged the discount window at the Federal Reserve or the BTFP.31, 2024.

We expect uncertainties related to economic headwinds discussed above, the impact of interest rate movements on the shape and inversions of the yield curve and the increasing cost and challenge for deposits ~~as well as disruptions to the economy and the U.S. banking system caused by bank failures during early~~that persisted through 2023, to ~~persist through~~continue during the remainder of ~~2023.~~2024.

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Asset Valuation

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our ~~2022~~2023 Form 10-K, at each reporting date between annual impairment tests, we consider potential indicators of impairment including the condition of the economy and financial services industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of our stock and other relevant events.

Given the potential impacts as a result of the operating performance of ~~these~~our reporting segments and overall economic conditions, actual results may differ materially from our current estimates as the scope of such impacts evolves or if the duration of business disruptions is longer than currently anticipated. We continue to monitor developments regarding overall economic conditions, market capitalization, and any other triggering events or circumstances that may indicate an impairment in the future.

~~In light of~~ Specifically, the ~~recent and continuing macroeconomic challenges in the mortgage industry given tight housing inventories and mortgage interest rate levels, and specifically the inability of our~~ mortgage origination segment ~~to meet forecasted projections, we identified these collective factors~~experienced operating losses during 2023 which have continued as ~~a triggering event during~~expected into the ~~second~~first quarter of ~~2023. As a result, we performed an interim quantitative impairment test on~~2024 due to conditions and challenges discussed in detail within the ~~mortgage origination segment’s goodwill as~~discussion of June 1, 2023 using revised forecasts and considering sensitivities of assumptions, the decline in its carrying value, and the resulting increase in the excess of its estimated fair value compared to the carrying value since October 1, 2022, concludedsegment results that ~~it was more likely than not that the mortgage origination segment’s estimated fair value of goodwill exceeded its carrying value.~~follow.

To the extent future operating performance of our reporting segments remain challenged and below forecasted projections during ~~2023,~~2024, significant assumptions such as expected future cash flows or the risk-adjusted discount rate used to estimate fair value are adversely impacted, or upon the occurrence of what management would deem to be a

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triggering event that could, under certain circumstances, cause us to perform impairment tests on our goodwill and other intangible assets, an impairment charge may be recorded for that period. In the event that we conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the respective amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Outlook

Our balance sheet, operating results and certain metrics during ~~2023~~2024 reflected economic headwinds that remain uncertain, and will depend on several developments outside of our control including, ~~tight housing inventories on mortgage volumes, declining deposit balances, increases~~among others, the timing and significance of further changes in U.S. treasury yields and mortgage interest rates, and a volatile economic forecast. As noted within our ~~2022~~2023 Form 10-K, these headwinds, coupled with exposure to increasing funding costs, inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, international armed conflicts and their impact on supply chains within our business segments during ~~2022 and the first nine months of~~ 2023 have had, and are expected to continue to have, an adverse impact on our operating results during ~~the remainder of 2023.~~2024.

Factors Affecting Results of Operations

As a financial institution providing products and services through our banking, broker-dealer and mortgage origination segments, we are directly affected by general economic and market conditions, many of which are beyond our control and unpredictable. A key factor impacting our results of operations is changes in the level of interest rates in addition to twists in the shape of the yield curve with the magnitude and direction of the impact varying across the different lines of business. Other factors impacting our results of operations include, but are not limited to, fluctuations in volume and price levels of securities, inflation, political events, investor confidence, investor participation levels, legal, regulatory, and compliance requirements and competition. All of these factors have the potential to impact our financial position, operating results and liquidity. In addition, the recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially change the regulation of the financial services industry and may significantly impact us.

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~~Factors Affecting Comparability of Results of Operations~~

~~LIBOR Cessation~~

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K, one week and two-month LIBOR ceased to be published on December 31, 2021, and all remaining USD LIBOR tenors ceased to be published or lost representativeness immediately after June 30, 2023.

Certain loans we originated bore interest at a floating rate based on LIBOR. We also paid interest on certain borrowings based on LIBOR, were counterparty to derivative agreements that were based on LIBOR and had contracts with payment calculations that used LIBOR as the reference rate.

In light of the LIBOR phase out, we took necessary actions, including the negotiation of certain of our agreements based on established alternative benchmark rates. Since the third quarter of 2020, PrimeLending has been originating conventional adjustable-rate mortgage, or ARM, loan products utilizing a SOFR rate with terms consistent with government-sponsored enterprise, or GSE, guidelines. In addition, the Bank’s management team has completed its efforts to amend LIBOR-based contractual terms and establish an alternative benchmark rate. To date, an immaterial amount of expenses have been incurred as a result of our efforts related to the transition of our systems and processes away from LIBOR.

Segment Information

The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. Consistent with our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.

The banking segment includes the operations of the Bank. The banking segment primarily provides business and consumer banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income. The Bank also derives revenue from other sources, including service charges on customer deposit accounts and trust fees.

The broker-dealer segment includes the operations of Securities Holdings, which operates through its wholly owned subsidiaries Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC. The broker-dealer segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop Securities is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.

The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products and generates revenue predominantly from fees charged on the origination and servicing of loans and from selling these loans in the secondary market.

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The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable business segments is presented in Note 21, Segment and Related Information, in the notes to our consolidated financial statements.

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The following table presents certain information about the results of our reportable business segments (in thousands). This table serves as a basis for the discussion and analysis in the segment operating results sections that follow.


	Three Months Ended September 30,				Variance 2023 vs 2022			Nine Months Ended September 30,				Variance 2023 vs 2022			Three Months Ended March 31,				Variance 2024 vs 2023
	2023		2022		Amount		Percent	2023		2022		Amount		Percent	2024		2023		Amount		Percent
Net interest income (expense):
Banking	$	99,047	$	110,939	$	(11,892)	(11)	$	304,804	$	304,269	$	535	0	$	91,606	$	104,770	$	(13,164)	(13)
Broker-Dealer		12,215		13,386		(1,171)	(9)		39,279		37,481		1,798	5		12,269		13,863		(1,594)	(11)
Mortgage Origination		(5,482)		(2,939)		(2,543)	(87)		(15,590)		(6,066)		(9,524)	(157)		(4,252)		(4,208)		(44)	(1)
Corporate		(3,175)		(3,276)		101	3		(9,976)		(9,856)		(120)	(1)		(3,103)		(3,322)		219	7
All Other and Eliminations ⁽¹⁾		13,045		5,376		7,669	143		37,105		9,705		27,400	282		7,101		10,602		(3,501)	(33)
Hilltop Consolidated	$	115,650	$	123,486	$	(7,836)	(6)	$	355,622	$	335,533	$	20,089	6	$	103,621	$	121,705	$	(18,084)	(15)

Provision for (reversal of) credit losses:
Banking	$	675	$	(650)	$	1,325	204	$	17,175	$	4,325	$	12,850	297	$	(2,853)	$	1,600	$	(4,453)	(278)
Broker-Dealer		(715)		(130)		(585)	(450)		(48)		346		(394)	(114)		(18)		731		(749)	(102)
Mortgage Origination		—		—		—	—		—		—		—	—		—		—		—	—
Corporate		—		—		—	—		—		—		—	—		—		—		—	—
All Other and Eliminations		—		—		—	—		—		—		—	—		—		—		—	—
Hilltop Consolidated	$	(40)	$	(780)	$	740	95	$	17,127	$	4,671	$	12,456	267	$	(2,871)	$	2,331	$	(5,202)	(223)

Noninterest income:
Banking	$	11,668	$	12,200	$	(532)	(4)	$	34,046	$	37,438	$	(3,392)	(9)	$	11,903	$	11,190	$	713	6
Broker-Dealer		106,488		100,798		5,690	6		297,164		249,139		48,025	19		104,578		90,635		13,943	15
Mortgage Origination		88,747		98,200		(9,453)	(10)		247,655		381,477		(133,822)	(35)		66,700		68,829		(2,129)	(3)
Corporate		3,159		1,809		1,350	75		8,944		5,655		3,289	58		5,785		2,704		3,081	114
All Other and Eliminations ⁽¹⁾		(13,213)		(6,032)		(7,181)	(119)		(37,815)		(11,033)		(26,782)	(243)		(7,348)		(10,864)		3,516	32
Hilltop Consolidated	$	196,849	$	206,975	$	(10,126)	(5)	$	549,994	$	662,676	$	(112,682)	(17)	$	181,618	$	162,494	$	19,124	12

Noninterest expense:
Banking	$	56,887	$	60,160	$	(3,273)	(5)	$	170,450	$	175,921	$	(5,471)	(3)	$	56,020	$	56,127	$	(107)	(0)
Broker-Dealer		97,865		96,843		1,022	1		283,063		268,307		14,756	5		97,947		90,345		7,602	8
Mortgage Origination		91,505		118,345		(26,840)	(23)		278,918		386,372		(107,454)	(28)		78,898		88,753		(9,855)	(11)
Corporate		13,937		14,034		(97)	(1)		45,750		44,388		1,362	3		17,384		15,513		1,871	12
All Other and Eliminations		(177)		(644)		467	73		(717)		(1,357)		640	47		(226)		(268)		42	16
Hilltop Consolidated	$	260,017	$	288,738	$	(28,721)	(10)	$	777,464	$	873,631	$	(96,167)	(11)	$	250,023	$	250,470	$	(447)	(0)

Income (loss) before taxes:
Banking	$	53,153	$	63,629	$	(10,476)	(16)	$	151,225	$	161,461	$	(10,236)	(6)	$	50,342	$	58,233	$	(7,891)	(14)
Broker-Dealer		21,553		17,471		4,082	23		53,428		17,967		35,461	197		18,918		13,422		5,496	41
Mortgage Origination		(8,240)		(23,084)		14,844	64		(46,853)		(10,961)		(35,892)	(327)		(16,450)		(24,132)		7,682	32
Corporate		(13,953)		(15,501)		1,548	10		(46,782)		(48,589)		1,807	4		(14,702)		(16,131)		1,429	9
All Other and Eliminations		9		(12)		21	175		7		29		(22)	(76)		(21)		6		(27)	(450)
Hilltop Consolidated	$	52,522	$	42,503	$	10,019	24	$	111,025	$	119,907	$	(8,882)	(7)	$	38,087	$	31,398	$	6,689	21

(1)	All other and eliminations amounts during each period include FDIC sweep program revenues and expenses earned on broker-dealer segment deposits placed with the banking segment that are eliminated in consolidation.

Key Performance Indicators

We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our business. In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other financial measures and non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our capital based on regulatory reporting requirements, measure the effectiveness of our operations and assess operational efficiencies. These indicators change from time to time as the opportunities and challenges in our businesses change.

Specifically, performance ratios and asset quality ratios are typically used for measuring the performance of banking and financial institutions. We consider return on average stockholders’ equity, return on average assets and net interest

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margin to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in the banking and financial industry. The net recoveries (charge-offs) to average loans outstanding ratio is also considered a key measure for our banking segment as it indicates the performance of our loan portfolio.

In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators, investors and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other financial services companies. We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios based on capital requirements administered by the federal banking agencies. The risk-based capital ratios are minimum supervisory ratios generally applicable to banking organizations, but banking organizations are widely expected to operate with capital positions well above the minimum ratios. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a material effect on our financial condition or results of operations.

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How We Generate Revenue

We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. The change in reportable business segment net interest income during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, primarily reflected a decrease within our ~~mortgage origination~~banking segment ~~partially offset by an increase within our broker-dealer segment.~~from increased cost of deposits due to the intense competition for liquidity as customers seek higher yields on deposits.

The other component of our revenue is noninterest income, which is primarily comprised of the following:

(i)

Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other related financial services that generated ~~$187.4~~$65.8 million and ~~$202.7~~$58.1 million in securities commissions and fees and investment and securities advisory fees and commissions, respectively, and ~~$72.1~~$31.2 million and ~~$41.5~~$22.0 million in gains from derivative and trading portfolio activities (included within other noninterest income), respectively, during the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024 and ~~2022.~~2023.

(ii)

Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the ~~nine~~three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022,~~ we generated ~~$247.5~~$66.6 million and ~~$380.8~~$68.7 million, respectively, in net gains from sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees.

In the aggregate, we experienced ~~a decrease~~an increase in noninterest income during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared to the same period in ~~2022,~~2023, as noted in the segment results table previously presented, primarily due to ~~a decrease of $133.4 million~~an increase in gains from derivative and trading portfolio activities within our broker-dealer segment and an increase in net gains from sale of loans within our mortgage loan origination segment, partially offset by decreases of other mortgage production income and mortgage loan origination fees within our mortgage origination ~~segment, partially offset by increases in gains from derivative and trading portfolio activities.~~segment.

We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.

Consolidated Operating Results

Income applicable to common stockholders during the three months ended ~~September 30, 2023~~March 31, 2024 was ~~$37.0~~$27.7 million, or ~~$0.57~~$0.42 per diluted share, compared with ~~$32.1~~$25.8 million, or ~~$0.50~~$0.40 per diluted share, during the three months ended September 30, 2022. Income applicable to common stockholders during the nine months ended September 30, 2023 was $81.0 million, or $1.25 per diluted share, compared with $87.6 million, or $1.21 per diluted share, during the nine months ended September 30, 2022.March 31, 2023. Hilltop’s financial results for the three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, included ~~decreases in year-over-year mortgage origination segment net gains from sales of loans and other mortgage production income,~~ a decline in net interest income, partially offset by a reversal of credit losses due to an improved economic outlook within the banking segment, ~~and increases~~an increase in net revenues within certain of the broker-dealer segment’s business ~~lines. Hilltop’s financial results for the nine months ended September 30, 2023, compared with the same period~~lines, and a decline in ~~2022, included changes consistent with those noted above~~other mortgage production income, partially offset by an increase in net gains from sale of loans within the mortgage origination ~~and broker-dealer segments, as well as an increase in the provision for credit losses from a build in the allowance within the banking~~ segment.

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Certain items included in net income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~ resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, and the acquisition of The Bank of River Oaks in an all-cash transaction (collectively, the “Bank Transactions”). Income before income taxes during the three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~ included net accretion on earning assets and liabilities of ~~$2.5~~$1.4 million and ~~$2.9~~$1.9 million, respectively, and amortization of identifiable intangibles of ~~$0.7~~$0.5 million and ~~$1.1~~$0.8 million, respectively, related to the Bank Transactions. During the nine months ended September 30, 2023 and 2022, income before income taxes included net accretion on earning assets and liabilities of $7.6 million and $8.5 million, respectively, and amortization of identifiable intangibles of $2.2 million and $3.3 million, respectively, related to the Bank Transactions.

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The information shown in the table below includes certain key performance indicators on a consolidated basis.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Return on average stockholders' equity⁽¹⁾	7.11	%	6.26	%	5.26	%	5.15	%	5.23	%	5.12	%
Return on average assets ⁽²⁾	0.94	%	0.79	%	0.70	%	0.70	%	0.74	%	0.69	%
Net interest margin^{(3) (4)}	3.02	%	3.19	%	3.11	%	2.75	%	2.85	%	3.28	%
Leverage ratio⁽⁵⁾ (end of period)					11.92	%	11.41	%	12.49	%	11.82	%
Common equity Tier 1 risk-based capital ratio ⁽⁶⁾ (end of period)					18.60	%	17.45	%	19.73	%	17.99	%

(1)	Return on average stockholders’ equity is defined as consolidated income attributable to Hilltop divided by average total Hilltop stockholders’ equity.

(2)	Return on average assets is defined as consolidated net income divided by average assets.

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred.

(4)

The securities financing operations within our broker-dealer segment had the effect of lowering both the net interest margin and taxable equivalent net interest margin by 2526 basis points and 2129 basis points during the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and 27 basis points and 20 basis points during the nine months ended September 30, 2023 and 2022,~~ respectively.

(5)	The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.

(6)

The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt).

We present net interest margin and net interest income below on a taxable-equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

During the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022,~~ purchase accounting contributed 74 and 86 basis points, respectively, to our consolidated taxable equivalent net interest margin of ~~3.04%~~2.87% and ~~3.20%~~3.28%, respectively. During the nine months ended September 30, 2023 and 2022, purchase accounting contributed 7 and 8 basis points respectively, to our consolidated taxable equivalent net interest margin of 3.12% and 2.76% respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled ~~$2.2~~$1.3 million and ~~$2.9~~$1.9 million during the three months ended ~~September 30,~~March 31, 2024 and 2023, and 2022, respectively, associated with the Bank Transactions. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled $7.4 million and $8.4 million during the nine months ended September 30, 2023 and 2022, respectively, associated with the Bank Transactions.

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The ~~tables~~table below ~~provide~~provides additional details regarding our consolidated net interest income (dollars in thousands).


	Three Months Ended September 30,												Three Months Ended March 31,
	2023						2022						2024						2023
	Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized
	Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or
	Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate
Assets
Interest-earning assets
Loans held for sale	$	1,075,518	$	15,649	5.82	%	$	1,166,265	$	14,414	4.94	%	$	802,098	$	11,655	5.81	%	$	815,393	$	10,724	5.26	%
Loans held for investment, gross ⁽¹⁾		7,972,604		126,753	6.31	%		7,911,833		94,751	4.75	%		7,835,647		122,676	6.28	%		7,894,668		112,655	5.79	%
Investment securities - taxable		2,690,977		27,166	4.04	%		2,883,412		19,642	2.72	%		2,619,081		26,241	4.01	%		2,813,734		25,602	3.64	%
Investment securities - non-taxable ⁽²⁾		315,294		3,069	3.89	%		312,312		2,817	3.61	%		293,420		2,992	4.08	%		412,543		3,286	3.19	%
Federal funds sold and securities purchased under agreements to resell		142,324		2,313	6.45	%		137,728		1,309	3.77	%		94,108		1,631	6.95	%		163,601		2,368	5.87	%
Interest-bearing deposits in other financial institutions		1,550,991		20,320	5.20	%		1,780,220		9,542	2.13	%		1,458,784		19,245	5.29	%		1,480,323		16,116	4.42	%
Securities borrowed		1,371,625		17,683	5.04	%		1,116,837		10,938	3.83	%		1,442,870		20,561	5.64	%		1,419,797		17,068	4.81	%
Other		69,827		4,407	25.04	%		56,331		3,425	24.12	%		39,885		5,190	52.19	%		63,219		3,706	23.77	%
Interest-earning assets, gross ⁽²⁾		15,189,160		217,360	5.68	%		15,364,938		156,838	4.05	%		14,585,893		210,191	5.78	%		15,063,278		191,525	5.16	%
Allowance for credit losses		(110,398)						(95,083)						(110,583)						(97,060)
Interest-earning assets, net		15,078,762						15,269,855						14,475,310						14,966,218
Noninterest-earning assets		1,448,834						1,399,228						1,522,337						1,336,908
Total assets	$	16,527,596					$	16,669,083					$	15,997,647					$	16,303,126

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,893,384	$	64,290	3.23	%	$	7,136,779	$	12,525	0.70	%	$	7,748,633	$	69,144	3.58	%	$	7,239,556	$	35,824	2.01	%
Securities loaned		1,303,883		16,169	4.92	%		980,530		9,407	3.81	%		1,401,975		19,039	5.45	%		1,323,857		15,346	4.70	%
Notes payable and other borrowings		1,527,371		20,646	5.36	%		1,262,985		11,054	3.47	%		1,327,889		17,810	5.38	%		1,490,075		18,552	5.05	%
Total interest-bearing liabilities		10,724,638		101,105	3.74	%		9,380,294		32,986	1.40	%		10,478,497		105,993	4.06	%		10,053,488		69,722	2.81	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		3,347,752						4,543,067						2,951,357						3,789,757
Other liabilities		362,133						685,843						420,355						390,107
Total liabilities		14,434,523						14,609,204						13,850,209						14,233,352
Stockholders’ equity		2,066,564						2,032,717						2,120,494						2,043,157
Noncontrolling interest		26,509						27,162						26,944						26,617
Total liabilities and stockholders' equity	$	16,527,596					$	16,669,083					$	15,997,647					$	16,303,126

Net interest income ⁽²⁾			$	116,255					$	123,852					$	104,198					$	121,803
Net interest spread ⁽²⁾					1.94	%					2.65	%					1.72	%					2.35	%
Net interest margin ⁽²⁾					3.04	%					3.20	%					2.87	%					3.28	%

Nine Months Ended September 30,

2023

2022


Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned

Yield or

Outstanding

Earned

Yield or

Balance

or Paid

Rate

Balance

or Paid

Rate

Assets

Interest-earning assets

Loans held for sale

$
979,099

$
40,497

5.51
%
$
1,335,447

$
40,680

4.06
%
Loans held for investment, gross ⁽¹⁾

7,967,075

363,682

6.17
%

7,863,257

257,621

4.43
%
Investment securities - taxable

2,759,436

79,487

3.84
%

2,810,993

52,512

2.49
%
Investment securities - non-taxable ⁽²⁾

380,269

10,306

3.61
%

295,523

8,270

3.73
%
Federal funds sold and securities purchased under agreements to resell

142,970

6,872

6.43
%

162,893

1,925

1.58
%
Interest-bearing deposits in other financial institutions

1,581,345

57,708

4.88
%

2,494,687

15,953

0.85
%
Securities borrowed

1,422,798

53,265

4.94
%

1,280,551

30,252

3.12
%
Other

71,909

11,879

22.09
%

54,971

5,187

12.62
%
Interest-earning assets, gross ⁽²⁾

15,304,901

623,696

5.45
%

16,298,322

412,400

3.38
%
Allowance for credit losses

(101,664)

(92,991)

Interest-earning assets, net

15,203,237

16,205,331

Noninterest-earning assets

1,380,989

1,439,017

Total assets

$
16,584,226

$
17,644,348

Liabilities and Stockholders' Equity

Interest-bearing liabilities

Interest-bearing deposits

$
7,625,569

$
154,840

2.71
%
$
7,698,557

$
22,174

0.39
%
Securities loaned

1,333,652

47,928

4.80
%

1,154,323

25,390

2.94
%
Notes payable and other borrowings

1,626,306

63,218

5.20
%

1,272,012

28,045

2.95
%
Total interest-bearing liabilities

10,585,527

265,986

3.36
%

10,124,892

75,609

1.00
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

3,557,765

4,534,513

Other liabilities

357,547

683,288

Total liabilities

14,500,839

15,342,693

Stockholders’ equity

2,056,885

2,274,911

Noncontrolling interest

26,502

26,744

Total liabilities and stockholders' equity

$
16,584,226

$
17,644,348

Net interest income ⁽²⁾

$
357,710

$
336,791

Net interest spread ⁽²⁾

2.09
%

2.38
%
Net interest margin ⁽²⁾

3.12
%

2.76
%

~~Table of Contents~~

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rate of 21% for the periods presented. The adjustment to interest income was $0.6 million and ~~$0.4~~$0.1 million for the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $2.1 million and $1.3 million for the nine months ended September 30, 2023 and 2022,~~ respectively.

The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and ~~reduce~~reduces our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.

On a consolidated basis, the ~~changes~~change in net interest income during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022, were~~2023, was primarily due to ~~the effects~~increased costs of ~~volume~~deposits and ~~rate changes within the mortgage warehouse lending, securities and~~increased average interest-bearing deposits ~~portfolios within~~with the banking segment ~~decreased~~and increased net yields on ~~mortgage~~ loans held for ~~sale, partially offset by a decrease in the average warehouse line balance with an unaffiliated bank~~investment within the ~~mortgage origination~~banking segment. Refer to the discussion in the “Banking Segment” section that follows for more details on the changes in net interest income, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items.

The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. During the three months ended ~~September 30, 2023,~~March 31, 2024, the ~~slight~~ reversal of credit losses reflected improvements to the U.S. economic outlook, ~~and decreases in specific reserves within our broker dealer segment,~~ offset by increases in specific reserves ~~and net portfolio changes~~ within the banking segment. The provision for credit losses during the nine months ended September 30, 2023 reflected a significant build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets. Refer to the discussion under the heading “Financial Condition – Allowance for Credit Losses on Loans” for more details regarding the significant assumptions and estimates involved in estimating credit losses.

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Noninterest income ~~decreased~~increased during the three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, primarily due to ~~decreases~~net increases within the broker-dealer segment’s structured finance, public finance services and wealth management business lines and increases in ~~total~~net gains from sale of loans within our mortgage origination segment loan sales volume and average loan sales margin within our mortgage origination segment, partially offset by ~~net increases primarily within the broker-dealer segment’s wealth management business lines~~decreases in mortgage loan origination fees and ~~public finance services.~~ other mortgage production income.

Noninterest ~~income decreased~~expense was relatively flat during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in 2022, primarily due to the changes noted above within our mortgage origination segment, partially offset by net increases primarily within the broker-dealer segment’s fixed income services, structured finance, public finance services and wealth management business lines.

~~Noninterest expense decreased during the three months ended September 30,~~ 2023, ~~compared with the same period in 2022,~~ primarily due to decreases in both variable and non-variable compensation and other segment costs within our mortgage origination segment associated with ~~the~~ decreased mortgage loan originations. Noninterest expense decreased during the nine months ended September 30, 2023, compared with the same period in 2022, primarily due to the changes previously noted within our mortgage origination segment,originations, partially offset by increases in both variable and non-variable compensation ~~and other segment operating costs~~ within our broker-dealer segment. We have experienced an increase in certain noninterest expenses during ~~2023~~2024 and ~~2022,~~2023, compared with respective prior periods, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs ~~through the remainder of 2023.~~during 2024.

Effective income tax rates during the three months ended ~~September 30,~~March 31, 2024 and 2023 were 22.5% and ~~2022 were 25.2% and 21.8%~~11.6%, ~~respectively, and for the nine months ended September 30, 2023 and 2022, were 21.6% and 22.7%~~ respectively. The effective tax rate during the ~~third quarter of~~three months ended March 31, 2023 was ~~higher~~lower than the applicable statutory rate primarily due to the impact of non-deductible compensation expense and other permanent adjustments. During the nine months ended September 30, 2023, the effective tax rate differs from the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax

~~Table of Contents~~

reserves, partially offset by nondeductible expenses. The effective tax rate during the three months ended March 31, 2024 was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by the ~~booking~~discrete impact of ~~additional taxes from a recent change~~restricted stock vesting during the quarter and investments in ~~the source of funding for an acquired non-qualified, deferred compensation plan.~~tax-exempt instruments.

Segment Results

Banking Segment

The following table presents certain information about the operating results of our banking segment (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Net interest income	$	99,047	$	110,939	$	(11,892)	$	304,804	$	304,269	$	535	$	91,606	$	104,770	$	(13,164)
Provision for (reversal of) credit losses		675		(650)		1,325		17,175		4,325		12,850		(2,853)		1,600		(4,453)
Noninterest income		11,668		12,200		(532)		34,046		37,438		(3,392)		11,903		11,190		713
Noninterest expense		56,887		60,160		(3,273)		170,450		175,921		(5,471)		56,020		56,127		(107)
Income before income taxes	$	53,153	$	63,629	$	(10,476)	$	151,225	$	161,461	$	(10,236)	$	50,342	$	58,233	$	(7,891)

The decrease in income before income taxes during the three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, was primarily due to a decline in net interest income, partially offset by a decrease in noninterest expenses. The decrease in income before income taxes during the nine months ended September 30, 2023, compared with the same period in 2022, was driven by an increase in the provision forreversal of credit ~~losses and a decrease in noninterest income, partially offset by a decline in noninterest expense.~~losses. Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.

As discussed in more detail below, given the intense competition for liquidity and as customers seek higher yields on deposits, the banking segment’s cost of deposits ~~has~~ increased ~~and we~~during the first quarter of 2024. We expect ~~it will~~such costs during 2024 to continue to ~~increase during the remainder of 2023.~~be driven by various factors, including continued intense competition for deposits, as well as economic and market area factors. The resulting net interest income spread compression has had, and is expected to continue to have, a negative impact on banking segment operating results.

The information shown in the table below includes certain key indicators of the performance and asset quality of our banking segment.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Efficiency ratio ⁽¹⁾	51.38	%	48.85	%	50.30	%	51.48	%	54.12	%	48.40	%
Return on average assets ⁽²⁾	1.20	%	1.41	%	1.17	%	1.16	%	1.20	%	1.44	%
Net interest margin ⁽³⁾	3.08	%	3.42	%	3.19	%	3.01	%	3.00	%	3.40	%
Net recoveries (charge-offs) to average loans outstanding⁽⁴⁾	0.08	%	(0.15)	%	(0.03)	%	(0.08)	%	(0.22)	%	(0.01)	%

(1)	Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider the efficiency ratio to be a measure of the banking segment’s profitability.

(2)	Return on average assets is defined as net income divided by average assets.

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator

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of profitability, as it represents interest earned on interest-earning assets compared to interest incurred.

(4)	Net recoveries (charge-offs) to average loans outstanding is defined as the greater of recoveries or charge-offs during the reported period minus charge-offs or recoveries divided by average loans outstanding. We use the ratio to measure the credit performance of our loan portfolio.

The banking segment presents net interest margin and net interest income in the following discussion and table below on a taxable equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

During the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022,~~ purchase accounting contributed 85 and 107 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of ~~3.09%~~3.00% and ~~3.43%~~3.41%, respectively. During the nine months ended September 30, 2023 and 2022, purchase accounting contributed 9 and 9 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.20% and 3.01% respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions presented in the Consolidated Operating Results section.

~~Table of Contents~~

The ~~tables~~table below ~~provide~~provides additional details regarding our banking segment’s net interest income (dollars in thousands).


	Three Months Ended September 30,												Three Months Ended March 31,
	2023						2022						2024						2023
	Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized
	Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or
	Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate
Assets
Interest-earning assets
Loans held for investment, gross ⁽¹⁾	$	7,831,250	$	118,307	5.99	%	$	7,460,437	$	88,054	4.68	%	$	7,703,946	$	115,502	6.01	%	$	7,693,626	$	104,632	5.52	%
Subsidiary warehouse lines of credit		982,621		20,515	8.17	%		1,078,422		16,012	5.81	%		756,594		15,331	8.02	%		726,470		13,481	7.42	%
Investment securities - taxable		2,227,564		18,070	3.24	%		2,426,451		12,203	2.01	%		2,167,991		18,100	3.34	%		2,414,077		18,034	2.99	%
Investment securities - non-taxable ⁽²⁾		112,161		960	3.42	%		111,775		989	3.54	%		111,581		936	3.36	%		113,894		1,010	3.55	%
Federal funds sold and securities purchased under agreements to resell		51,518		725	5.58	%		80,811		541	—	%		70,555		1,002	5.70	%		100,806		1,203	4.84	%
Interest-bearing deposits in other financial institutions		1,496,590		20,320	5.39	%		1,662,342		9,542	2.28	%		1,414,302		19,245	5.46	%		1,406,128		16,116	4.65	%
Other		54,599		649	4.72	%		36,849		2,154	23.19	%		37,415		425	4.56	%		43,482		443	4.13	%
Interest-earning assets, gross ⁽²⁾		12,756,303		179,546	5.58	%		12,857,087		129,495	4.00	%		12,262,384		170,541	5.58	%		12,498,483		154,919	5.03	%
Allowance for credit losses		(109,798)						(94,690)						(110,489)						(95,621)
Interest-earning assets, net		12,646,505						12,762,397						12,151,895						12,402,862
Noninterest-earning assets		841,953						937,190						799,415						872,528
Total assets	$	13,488,458					$	13,699,587					$	12,951,310					$	13,275,390

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,774,751	$	75,728	3.86	%	$	6,871,441	$	16,409	0.95	%	$	7,653,498	$	74,908	3.93	%	$	7,045,714	$	44,440	2.56	%
Notes payable and other borrowings		494,660		4,611	3.70	%		352,299		1,938	2.18	%		459,750		3,881	3.39	%		585,360		5,511	3.82	%
Total interest-bearing liabilities		8,269,411		80,339	3.85	%		7,223,740		18,347	1.01	%		8,113,248		78,789	3.90	%		7,631,074		49,951	2.65	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		3,493,995						4,741,624						3,107,882						3,934,399
Other liabilities		159,681						151,313						159,315						153,350
Total liabilities		11,923,087						12,116,677						11,380,445						11,718,823
Stockholders’ equity		1,565,371						1,582,910						1,570,865						1,556,567
Total liabilities and stockholders’ equity	$	13,488,458					$	13,699,587					$	12,951,310					$	13,275,390

Net interest income ⁽²⁾			$	99,207					$	111,148					$	91,752					$	104,968
Net interest spread ⁽²⁾					1.73	%					2.99	%					1.68	%					2.38	%
Net interest margin ⁽²⁾					3.09	%					3.43	%					3.00	%					3.41	%

Nine Months Ended September 30,

2023

2022


Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned

Yield or

Outstanding

Earned

Yield or

Balance

or Paid

Rate

Balance

or Paid

Rate

Assets

Interest-earning assets

Loans held for investment, gross ⁽¹⁾

$
7,797,199

$
337,811

5.79
%
$
7,307,478

$
241,170

4.41
%
Subsidiary warehouse lines of credit

889,810

53,147

7.88
%

1,239,312

43,211

4.60
%
Investment securities - taxable

2,328,786

54,541

3.12
%

2,374,314

30,886

1.73
%
Investment securities - non-taxable ⁽²⁾

113,257

2,970

3.50
%

108,946

2,852

3.49
%
Federal funds sold and securities purchased under agreements to resell

55,788

2,142

5.19
%

120,790

1,025

1.15
%
Interest-bearing deposits in other financial institutions

1,525,746

57,708

5.06
%

2,349,273

15,953

0.91
%
Other

55,261

1,880

4.55
%

36,824

2,176

7.90
%
Interest-earning assets, gross ⁽²⁾

12,765,847

510,199

5.34
%

13,536,937

337,273

3.33
%
Allowance for credit losses

(100,653)

(92,562)

Interest-earning assets, net

12,665,194

13,444,375

Noninterest-earning assets

849,505

920,984

Total assets

$
13,514,699

$
14,365,359

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
7,481,101

$
186,557

3.33
%
$
7,523,367

$
28,684

0.51
%
Notes payable and other borrowings

623,179

18,293

3.92
%

277,152

3,711

1.79
%
Total interest-bearing liabilities

8,104,280

204,850

3.38
%

7,800,519

32,395

0.56
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

3,696,399

4,797,683

Other liabilities

150,247

135,825

Total liabilities

11,950,926

12,734,027

Stockholders’ equity

1,563,773

1,631,332

Total liabilities and stockholders’ equity

$
13,514,699

$
14,365,359

Net interest income ⁽²⁾

$
305,349

$
304,878

Net interest spread ⁽²⁾

1.96
%

2.77
%
Net interest margin ⁽²⁾

3.20
%

3.01
%

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for all the periods presented. The adjustment to interest income was ~~$0.2~~$0.1 million and $0.2 million for the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $0.6 million and $0.6 million for the nine months ended September 30, 2023 and 2022,~~ respectively.

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The banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.

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The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2023 vs. 2022						2023 vs. 2022						2024 vs. 2023
	Change Due To ⁽¹⁾						Change Due To ⁽¹⁾						Change Due To ⁽¹⁾
	Volume		Yield/Rate		Change		Volume		Yield/Rate		Change		Volume		Yield/Rate		Change
Interest income
Loans held for investment, gross ⁽²⁾	$	4,374	$	25,879	$	30,253	$	16,153	$	80,488	$	96,641	$	142	$	10,728	$	10,870
Subsidiary warehouse lines of credit ⁽³⁾		(1,403)		5,906		4,503		(12,019)		21,955		9,936		557		1,293		1,850
Investment securities - taxable		(1,008)		6,875		5,867		(591)		24,246		23,655		(1,833)		1,899		66
Investment securities - non-taxable ⁽⁴⁾		3		(32)		(29)		113		5		118		(20)		(54)		(74)
Federal funds sold and securities purchased under agreements to resell		—		184		184		(558)		1,675		1,117		(365)		164		(201)
Interest-bearing deposits in other financial institutions		(951)		11,729		10,778		(5,592)		47,347		41,755		95		3,034		3,129
Other		1,038		(2,543)		(1,505)		1,089		(1,385)		(296)		(62)		44		(18)
Total interest income ⁽⁴⁾		2,053		47,998		50,051		(1,405)		174,331		172,926		(1,486)		17,108		15,622

Interest expense
Deposits	$	2,157	$	57,162	$	59,319	$	(161)	$	158,034	$	157,873	$	3,876	$	26,592	$	30,468
Notes payable and other borrowings		783		1,890		2,673		4,633		9,949		14,582		(1,196)		(434)		(1,630)
Total interest expense		2,940		59,052		61,992		4,472		167,983		172,455		2,680		26,158		28,838

Net interest income ⁽⁴⁾	$	(887)	$	(11,054)	$	(11,941)	$	(5,877)	$	6,348	$	471	$	(4,166)	$	(9,050)	$	(13,216)

(1)	Changes attributable to both volume and yield/rate are included in yield/rate column.

(2)

Changes in the yields earned on loans held for investment, gross included ~~declines~~a decline of $0.6 ~~million and $0.9~~ million in accretion of discount on loans during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022.~~2023. Accretion of discount on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed.

(3)	Subsidiary warehouse lines of credit extended to PrimeLending are eliminated from the consolidated financial statements.

(4)	Annualized taxable equivalent.

With regard to net interest income, as of ~~September 30, 2023,~~March 31, 2024, the banking segment maintained an asset sensitive rate risk position, meaning the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. During a period of rising interest rates, being asset sensitive tends to result in an increase in net interest income, but during a period of declining interest rates, tends to result in a decrease in net interest income. Even with the rising interest rate environment during the three months ended March 31 2024, net interest income decreased as compared to the same period in 2023 due to increased costs of our deposits given the intense competition for liquidity and the banking industry disruption, and as customers seek higher yields on deposits.

Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. The extent and timing of this impact on interest income will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of management strategies. At ~~September 30, 2023,~~March 31, 2024, approximately ~~$761~~$680 million of our floating rate loans held for investment remained at or below their applicable rate floor, exclusive of our mortgage warehouse lending program, of which approximately ~~85%~~79% are not scheduled to reprice for more than one year based upon agreed-upon terms. If interest rates rise further, yields on the portion of our loan portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates, unless such loans are refinanced or repaid. Competition for loan growth could also continue to put pressure on new loan origination rates. If interest rates were to fall, the impact on our interest income for certain variable-rate loans would be limited by these rate floors.

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Additionally, within our banking segment, the composition of the deposit base and ultimate cost of funds on deposits and net interest income are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. Deposit products and pricing structures relative to the market are regularly evaluated to maintain competitiveness over time. During a period of rising interest rates, the cost of funds on deposits, and therefore, interest expense, tends to increase. Given the intense competition for liquidity and the banking industry disruption, and as customers seek higher yields on deposits, our cost of deposits increased during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024, compared to the same ~~periods~~period of ~~2022 and we~~2023. We expect ~~that the Bank’s interest expense related~~such costs during 2024 to ~~certain deposits will~~ continue to ~~increase during the remainder~~be driven by various factors, including continued intense competition for deposits, as well as economic and

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market area factors. The Bank’s deposit base primarily includes a combination of commercial, wealth and public funds deposits, without a high level of industry concentration. At ~~September 30, 2023,~~March 31, 2024, total estimated uninsured deposits were ~~$4.4~~$4.8 billion, or approximately ~~40%~~44% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of ~~$276.3~~$360.5 million, were ~~$4.2~~$4.5 billion, or approximately ~~37%~~41% of total deposits.

Refer to the discussion in the “Liquidity and Capital Resources – Banking Segment” section that follows for more detail regarding the Bank’s activities regarding deposits, available liquidity and borrowing capacity.

To help mitigate net interest income spread compression between our assets and liabilities as the Federal Reserve increases interest rates, management continues to execute certain derivative trades, as either cash flow hedges or fair value hedges, that benefit the banking segment as interest rates rise. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.

The banking segment retained approximately ~~$8.8~~$32.3 million and ~~$130.1~~$66.0 million in mortgage loans originated by the mortgage origination segment during the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $135.2 million and $343.1 million in mortgage loans originated by the mortgage origination segment during the nine months ended September 30, 2023 and 2022,~~ respectively. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. Specifically, during the three months ended ~~September 30, 2023,~~March 31, 2024, the ~~provision for~~reversal of credit losses reflected improvements to the U.S. economic outlook, offset by increases in specific reserves ~~and net portfolio changes since~~within the prior period, while the provision for credit losses during the nine months ended September 30, 2023, reflected a significant build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets.banking segment. The net impact to the allowance of changes associated with collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included a reversal of credit losses of ~~$0.3~~$7.0 million, ~~compared to a provision for credit losses of $14.2 million, respectively,~~ while individually evaluated loans included a provision for credit losses of ~~$0.9~~$4.1 million. The change in the allowance for credit losses during the three months ended March 31, 2024 was also impacted by net charge-offs of $4.3 million. During the three months ended March 31, 2023, the banking segment’s provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from the fourth quarter of 2023 and recovery from the third quarter of 2024 compared to the prior quarter’s U.S. recession assumption during the last three quarters of 2023. The net impact to the allowance of changes associated with individually and collectively evaluated loans during the three months ended March 31, 2023 included a provision for credit losses of $0.1 million and ~~$3.0~~$1.5 million, respectively. The change in the allowance for credit losses during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 were also impacted by net recoveries of $1.6 million and net charge-offs of $1.7 million, respectively. During the three months ended September 30, 2022, the banking segment’s reversal of credit losses reflected modest improvements in the U.S. economic outlook compared to assumptions in the prior quarter outlook, and in specific reserves and credit metrics since the prior quarter, while the provision for credit losses during the nine months ended September 30, 2022 was driven by a deteriorating U.S economic outlook since December 31, 2021. The net impact to the allowance of changes associated with individually evaluated loans during the three and nine months ended September 30, 2022 included reversals of credit losses of $0.1 million and $1.6 million, respectively, while collectively evaluated loans included a reversal of credit losses of $0.5 million, compared to a provision for credit losses of $5.9 million, respectively. The changes in the allowance for credit losses during the three and nine months ended September 30, 2022 were also impacted by net charge-offs of ~~$2.7 million and $4.2 million, respectively.~~$0.4 million. The changes in the allowance for credit losses during the noted periods also reflected other factors including, but not limited to, loan growth, loan mix and changes in risk grades and qualitative factors from the prior quarter. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.

The banking segment’s noninterest income increased during the three months ended March 31, 2024, compared to the same period in 2023, primarily due to an increase in oil and gas management fees.

The banking segment’s noninterest expense was relatively flat during the three months ended March 31, 2024, compared to the same period in 2023.

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The banking segment’s noninterest income decreased during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to a decline in service charges on depositor accounts and wealth management fee income.

The banking segment’s noninterest expense decreased during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to decreases in compensation-related expenses, partially offset by an increase in FDIC assessment expenses.

Broker-Dealer Segment

The following table provides additional details regarding our broker-dealer segment operating results (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Net interest income:
Wealth management:
Securities lending	$	1,514	$	1,531	$	(17)	$	5,337	$	4,862	$	475	$	1,522	$	1,722	$	(200)
Clearing services		2,458		1,888		570		5,416		5,998		(582)		2,650		1,481		1,169
Structured finance		1,603		1,544		59		5,980		4,995		985		1,723		2,625		(902)
Fixed income services		(895)		4,550		(5,445)		1,827		15,163		(13,336)		(760)		2,018		(2,778)
Other		7,535		3,873		3,662		20,719		6,463		14,256		7,134		6,017		1,117
Total net interest income		12,215		13,386		(1,171)		39,279		37,481		1,798		12,269		13,863		(1,594)
Noninterest income:
Securities commissions and fees by business line ⁽¹⁾:
Fixed income services		6,283		6,984		(701)		19,360		25,658		(6,298)		8,452		6,620		1,832
Wealth management:
Retail		21,340		19,341		1,999		65,887		56,964		8,923		21,043		21,004		39
Clearing services		10,073		7,440		2,633		30,501		18,922		11,579		9,370		10,774		(1,404)
Structured finance		2,389		3,652		(1,263)		6,310		8,237		(1,927)		2,746		1,906		840
Other		606		958		(352)		2,273		2,917		(644)		700		668		32
		40,691		38,375		2,316		124,331		112,698		11,633		42,311		40,972		1,339
Investment and securities advisory fees and commissions by business line:
Public finance services		29,317		25,399		3,918		68,858		65,549		3,309		18,852		17,950		902
Fixed income services		1,477		1,677		(200)		4,481		5,055		(574)		2,069		946		1,123
Wealth management:
Retail		7,888		7,313		575		23,068		23,793		(725)		8,544		7,361		1,183
Clearing services		427		406		21		1,250		1,354		(104)		436		393		43
Structured finance		479		153		326		698		719		(21)		246		138		108
Other		74		83		(9)		191		268		(77)		79		60		19
		39,662		35,031		4,631		98,546		96,738		1,808		30,226		26,848		3,378
Other:
Structured finance		17,976		23,966		(5,990)		49,059		40,357		8,702		25,470		15,009		10,461
Fixed income services		7,763		3,626		4,137		23,080		1,008		22,072		5,859		6,848		(989)
Other		396		(200)		596		2,148		(1,662)		3,810		712		958		(246)
		26,135		27,392		(1,257)		74,287		39,703		34,584		32,041		22,815		9,226
Total noninterest income		106,488		100,798		5,690		297,164		249,139		48,025		104,578		90,635		13,943
Net revenue ⁽²⁾		118,703		114,184		4,519		336,443		286,620		49,823		116,847		104,498		12,349
Noninterest expense:
Variable compensation ⁽³⁾		39,929		42,567		(2,638)		105,548		106,663		(1,115)		35,274		30,821		4,453
Non-variable compensation and benefits		30,001		27,707		2,294		92,101		83,930		8,171		34,183		31,608		2,575
Segment operating costs ⁽⁴⁾		27,220		26,439		781		85,366		78,060		7,306		28,472		28,647		(175)
Total noninterest expense		97,150		96,713		437		283,015		268,653		14,362		97,929		91,076		6,853

Income (loss) before income taxes	$	21,553	$	17,471	$	4,082	$	53,428	$	17,967	$	35,461
Income before income taxes													$	18,918	$	13,422	$	5,496

(1)

Securities commissions and fees includes income from FDIC sweep investments with the banking segment of ~~$12.7~~$6.8 million and ~~$4.3~~$9.8 million during the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $35.5 million and $6.7 million during the nine months ended September 30, 2023 and 2022,~~ respectively, that is eliminated in consolidation.

(2)

Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is the primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a revenue basis for comparability with our banking segment.

(3)	Variable compensation represents performance-based commissions and incentives.

(4)	Segment operating costs include provision for (reversal of) credit losses associated with the broker-dealer segment within other noninterest expenses.

The increase in net revenue and income before income taxes for the three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, was ~~primary~~primarily due to improved period-over-period results within our ~~wealth management and~~structured finance, public finance services and wealth management business lines, partially offset by declines within our fixed income services ~~and~~business line. The structured finance business ~~lines. The wealth management business~~ line’s net ~~revenue improvement~~revenues increase was ~~driven by improved customer balance revenues,~~primarily due to an increase in our structured housing business which ~~included increases~~benefited from certain states’ support of their Down Payment Assistance programs as well as an increase in ~~FDIC sweep revenue, despite weaker retail division transactional production.~~commissions earned on commodities transactions. The increase in net revenues in the broker-dealer segment’s public finance services business line was primarily due to fees earned from managed assets ~~within our treasury~~and municipal advisory revenues. The wealth management ~~division and municipal~~

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business line’s net revenue improvement was driven by improved advisory fees revenues ~~despite the overall decline in national issuances.~~generated from customer assets under management. This increase was partially offset by a decrease in underwriting revenues due to weaker investment grade underwriting results. The decrease in net revenues in the broker-dealer segment’s fixed income services business line was primarily due to declines in revenues from ~~trading activities, trading profits and~~ net interest income ~~from the increase in the cost to carry~~earned on inventory positions ~~while the broker-dealer segment’s structured finance business line experienced a decrease in net revenues due to the overall volatility in the market, largely driven~~and trading profits, partially offset by ~~activity related to a small number of clients.~~

The increase in net revenue and income before income taxes for the nine months ended September 30, 2023, compared to the same period in 2022, was primarily related to the combined impacts of the rising interest rate environment and a more favorable housing environment in certain areas of the country, which was evidenced by improved results period-over-period within our various business lines. All the broker-dealer business lines experienced an increase in net revenues when compared to the nine months ended September 30, 2022. Specifically, the broker-dealer segment’s structured finance business line experienced an increase in net revenues due to increased production volumes, and support from certain state legislatures for down payment assistance programs. The wealth management business line’s net revenue improvement was driven by improved customer balance revenues, which included increases in FDIC sweep revenue, despite weaker retail division transactional production. The increase in net revenues in the broker-dealer segment’s fixed income services business line was primarily due to improved trading revenues in both taxable and municipal products offset by a decrease in net interest income from the increase in the cost to carry inventory positions. The increase in net revenues in the broker-dealer segment’s public finance services business line was primarily due to fees earned from managed assets within our treasury management division and underwriting transactions, offset by a decrease in advisory revenue due to the unfavorable national issuance trends.commission revenues.

The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in interest rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are

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likely to have a meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of its revenues from advisory fees upon the successful completion of client transactions, which could be adversely impacted by interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short-term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs. The broker-dealer segment is also exposed to interest rate risk through its structured finance business line, which is dependent on mortgage loan production that tends to be adversely impacted by increasing interest rates and may result in valuation-related adjustments.

The broker-dealer segment experienced lower-than-forecasted operating results during 2022 given trends related to the combination of rapid or significant changes in interest rates, the sharp decline in mortgage loan origination volumes, customer sensitivity to interest rates and resulting demand for certain products. Such trends have resulted in a challenging environment associated with the broker-dealer segment’s short- and long-term financial condition, resulting in variability in its operating results. In the event future operating performance remains challenged and below our forecasted projections, there are negative changes to long-term growth rates or discount rates increase, the fair value of the broker-dealer segment reporting unit may decline and we may be required to record a goodwill impairment charge. These conditions will continue to be considered during future impairment evaluations of reporting unit goodwill.

In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The decrease in net interest income during the three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, was primarily due to the decrease in net interest income from the fixed income services business line due to ~~the increased cost to carry those inventories. The increase~~decreases in ~~net~~ interest ~~income during the nine months ended September 30, 2023, compared with the same period in 2022 was primarily due to the increase in the amount of interest received~~earned on ~~a structured product investment.~~inventory positions.

Noninterest income increased during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022, primarily~~2023, due to increases in securities commissions and fees, investment and securities advisory fees and commissions and ~~for the nine months ended September 30, 2023,~~ other ~~noninterest income, partially offset by the decrease in other noninterest income for the three months ended September 30, 2023.~~income.

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Securities commissions and fees increased during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022,~~2023, primarily due to ~~an increase~~increases in ~~FDIC sweep revenue given higher short-term interest rates,~~fixed income and commodities commissions, partially offset by a decrease in ~~fixed income and retail commissions. As~~ FDIC sweep revenues ~~are closely correlated~~and net clearing revenues due to ~~short-term interest rates, changes~~a decrease in ~~short-term interest rates may affect these revenues. FDIC sweep program revenues earned on deposits placed with~~ the ~~banking segment are eliminated in consolidation.~~number of correspondents.

Investment and securities advisory fees and commissions increased during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022. For the three months ended September 30,~~ 2023, ~~the increase was~~ primarily due to increases in fees earned from managed assets ~~within our treasury management division of our public finance services business line~~ and municipal advisory. For the nine months ended September 2023, the increase was primarily due to increases in fees earned from managed assets within our treasury management division of our public finance services business line and underwritingadvisory transactions.

The increase in other noninterest income during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, was primarily due to increases in trading gains earned from structured finance ~~and~~trading activities, partially offset by decreases in trading gains earned from fixed income trading activities. ~~Specifically,~~Despite the decrease in mortgage originations ~~increased 86%~~ for the ~~nine~~three months ended ~~September 30, 2023~~March 31, 2024, the rates received from the closed pools increased 80 basis points and ~~customer~~buy-side demand improved when compared with the same period in ~~2022. Increased~~2023. Decreased fixed income trading gains for the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022, were~~2023, was primarily driven by municipal and mortgage-backed securities trading. Also contributing to the overall increase in noninterest income was an increase in the value of the broker-dealer segment’s deferred compensation plan’s assets of $2.4 million for the nine months ended September 30, 2023 when compared with the same period in 2022. For the three months ended September 30, 2023, other noninterest income decreased when compared to the same period in 2022 primarily due to the volatility in the housing market which contributed to decreased structured finance trading activities. This decrease was partially offset by increases in trading gains earned from fixed income trading activities, which were primarily driven by asset-backedtaxable securities trading. With the expected rise in interest rates continuing ~~throughout 2023,~~during 2024, we anticipate continued volatility in trading revenues.

The increase in noninterest expenses during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022, were due to increases in segment compensation and operating costs. For the three months ended September 30,~~ 2023, ~~the increase in noninterest expense~~ was primarily due to increases in ~~travel expenses, transaction clearing costs and legal fees. For the nine months ended September 30, 2023, the increase in~~ segment compensation was primarily due to the impact of changes in variable compensation on improved results, increases in deferred compensation expenses from both the restricted stock plan and the broker-dealer segment’s deferred compensation plan as well as overall increases in fixed compensation. The remaining increase in noninterest expenses during the nine months ended September 30, 2023, compared with the same period in 2022, were attributable to an increase in software expenses, travel expenses, quotation and transaction clearing costs and legal fees.

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Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2023				2022		2023				2022		2024				2023
Total compensation as a % of net revenue ⁽¹⁾		58.9	%		61.5	%		58.7	%		66.5	%		59.4	%		59.7	%
Pre-tax margin ⁽²⁾		18.2	%		15.3	%		15.9	%		6.3	%		16.2	%		12.8	%
FDIC insured program balances at the Bank (end of period)							$	1,382,088		$	663,730		$	754,268		$	1,601,823
Other FDIC insured program balances (end of period)							$	686,920		$	1,376,741		$	1,208,696		$	848,235
Customer funds on deposit, including short credits (end of period)							$	223,582		$	329,948		$	220,932		$	245,588

Public finance services:
Number of issues ⁽³⁾		230			246			648			760			172			154
Aggregate amount of offerings ⁽³⁾	$	16,808,056		$	15,726,654		$	37,838,865		$	33,919,594		$	12,802,889		$	9,118,401

Structured finance:
Lock production/TBA volume	$	2,967,155		$	1,300,944		$	5,735,003		$	3,088,340		$	614,182		$	1,187,826

Fixed income services:
Total volumes	$	69,964,657		$	50,276,258		$	177,028,598		$	175,487,156		$	88,056,791		$	47,497,874
Net inventory (end of period)							$	527,302		$	542,257		$	597,075		$	641,328

Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of period)								94			96			91			99
Independent registered representatives (end of period)								188			171			185			188
Correspondents (end of period)								109			110			100			110
Correspondent receivables (end of period)							$	125,874		$	115,810		$	139,391		$	90,449
Customer margin balances (end of period)							$	231,369		$	286,691		$	190,461		$	271,032

Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)							$	1,368,945		$	1,182,934		$	1,398,644		$	1,416,426
Interest-bearing liabilities - stock loaned (end of period)							$	1,304,884		$	1,072,408		$	1,366,956		$	1,303,657

(1)	Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a key performance measure and indicator of segment profitability.

(2)	Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric representing the percentage of net revenue earned that results in a profit.

(3)	Noted balances during all prior periods include certain reclassifications to conform to current period presentation.

Mortgage Origination Segment

The following table presents certain information regarding the operating results of our mortgage origination segment (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Net interest income (expense)	$	(5,482)	$	(2,939)	$	(2,543)	$	(15,590)	$	(6,066)	$	(9,524)	$	(4,252)	$	(4,208)	$	(44)
Noninterest income		88,747		98,200		(9,453)		247,655		381,477		(133,822)		66,700		68,829		(2,129)
Noninterest expense		91,505		118,345		(26,840)		278,918		386,372		(107,454)		78,898		88,753		(9,855)
Loss before income taxes	$	(8,240)	$	(23,084)	$	14,844	$	(46,853)	$	(10,961)	$	(35,892)	$	(16,450)	$	(24,132)	$	7,682

The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal transaction volumes and interest rate fluctuations. Historically, the mortgage origination segment has experienced increased loan origination volume from purchases of homes during the spring and summer months, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased loan origination volume from refinancings. While changes in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume, net increases in mortgage interest rates ~~that began in 2022 and~~during the last two years have ~~continued into 2023 have also~~ continued to negatively impact home purchase volume through the first ~~nine~~three months of ~~2023.~~2024. A slight decline in mortgage rates experienced since the fourth quarter of 2023 have had a minimal impact on 2024 loan origination volume. See details regarding loan origination volume in the table below.

Recent trends, as well as typical historical patterns in loan origination volume from purchases of homes or from refinancings because of movements in mortgage interest rates, may not be indicative of future loan origination volumes. During ~~2022~~2023, and continuing through the first ~~nine~~three months of ~~2023,~~2024, certain events have adversely impacted total mortgage market origination volumes because of their effect on the economy, including inflation and rising interest

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rates, the Federal Reserve’s actions and communications, and geopolitical threats. These events have also adversely impacted the willingness and ability of the mortgage origination segment’s customers to conduct mortgage transactions. Specifically, current home inventory shortages and affordability challenges are impacting customers’ abilities to purchase homes. ~~In addition, continued~~Competitive mortgage ~~industry excess capacity has adversely impacted PrimeLending’s individual loan origination volume. The increase in interest rates that began~~pricing pressure experienced during ~~2022, which has led to~~the last two years driven by a sharp

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reduction in national refinancing volume and athe reduction of willing and eligible home buyers, has ~~resulted in competitive mortgage pricing pressure, leading~~slightly eased during the first quarter of 2024. This led to ~~a decline~~an increase in the average combined net gains from mortgage loan sales and mortgage loan origination fees ~~through March 31,~~when compared to the same period in 2023. Between March 31, 2023 and September 30, 2023, the average combined net gains from loan sales and mortgage loan origination fees increased slightly, but still remained below the average for the three months ended March 31, 2022. Currently, we anticipate ~~that lower~~ seasonal transaction volumes, ~~and the continuation of the~~while lower than historically experienced, to slightly improve mortgage loan production and operating results trends ~~experienced~~anticipated by the mortgage origination segment during the second and third quarters of 2024 compared to the first ~~nine months~~quarter of ~~2023 will continue through~~2024. We expect the ~~remainder~~fourth quarter of ~~2023. Given these expectations,~~2024 to more closely follow loan production and operating results experienced during the first quarter of 2024. PrimeLending continues to evaluate its cost structure to address the current mortgage environment.

We believe that ongoing initiatives are critical to improving PrimeLending’s short- and long-term financial condition and operating results. ~~As noted under the section titled “Asset Valuation” earlier in this Item 2, the~~The mortgage origination segment experienced operating losses during ~~the second half of 2022~~2023 which have continued ~~as expected~~ into the first quarter of ~~2023~~2024 due to conditions discussed in detail within this discussion of segment results. ~~However, beginning in the second quarter of 2023, the mortgage origination segment’s operating losses continued and did not meet our forecasted projections.~~ In light of these macroeconomic challenges in the mortgage industry ~~given~~including tight housing inventories and mortgage interest rate levels, and specifically the inability of our mortgage origination segment to meet forecasted projections, we identified these collective factors as a triggering event during the second quarter of 2023. As a result, we performed an interim quantitative impairment test as of June 1, 2023 using revised forecasts and concluded that it was more likely than not that the mortgage origination segment’s estimated fair value of goodwill exceeded its carrying value. However, in the event future operating performance remains challenged, the fair value of the mortgage origination reporting unit may decline and we may be required to record a goodwill impairment charge. These conditions will continue to be considered during future impairment evaluations of reporting unit goodwill.

As a GNMA approved lender, we are subject to certain HUD and GNMA minimum capital ratio reporting requirements, including timely reporting if a quarter’s operating loss exceeds more than 20% of its previous quarter or year-end net worth (“the operating loss ratio”) and/or if a quarter’s capital ratio is below 6% (“the GNMA capital ratio”). If this occurs, certain additional financial reporting submissions are required. During the first ~~quarter~~and fourth quarters of 2023, the HUD operating loss ratio was 21.2% and 20.5%, respectively, which ~~was~~were reported to HUD. During the second and third quarters of 2023, the HUD operating loss ratio decreased to 15.8% and 10.0%, respectively. During the first quarter of 2024, the HUD operating loss ratio was 22.6%. During each quarter of 2023, the GNMA capital ratio exceeded the required 6%, however during the first quarter of 2024, the GNMA capital ratio decreased to 5.56%. These trends have been reported to GNMA and HUD, respectively.

In addition, as a FNMA and FHLMC approved lender, we are subject to certain minimum capital, net worth and liquidity requirements established by FNMA and FHLMC. These agencies may also monitor additional financial performance trends at their discretion, including risk-based analyses focused on loans that the mortgage origination segment is currently responsible for representation and warranties that agency loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. One FNMA discretionary performance trend monitors the change in adjusted net worth during the prior twelve months. FNMA’s acceptable threshold for this performance trend is less than minus 30%, but is only considered if a company has four consecutive quarterly losses. During the second, third and fourth quarters of 2023, PrimeLending experienced four consecutive quarterly losses; the loss ratio during these periods were 50.2%, 37.6% and 39.8%, respectively. During the first quarter of 2024, the loss ratio was 37.5%. These trends have been reported to FNMA.

The loss before income taxes decreased ~~moderately~~ during the three months ended ~~September 30, 2023 and increased significantly during the nine months ended September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022.~~2023. The decrease during the three months ended ~~September 30, 2023~~March 31, 2024, was primarily the result of an increase in the average ~~value of mortgage~~ loan ~~origination fees~~sales margin and a decrease in noninterest expense, partially offset by decreases in the volume of interest rate lock commitments (“IRLCs”) related to a decrease in mortgage loan applications and mortgage loan originations, ~~and loan sales,~~ compared to the same period in 2022. The increase during the nine months ended September 30, 2023, was primarily the result of decreases in the volume of IRLCs, mortgage loan originations and mortgage loan sales and an increase in the net interest expense, partially offset by a decrease in noninterest expense, compared to the same period in 2022.2023.

During 2022 and continuing ~~into~~through the ~~third~~beginning of the fourth quarter of 2023, the U.S. 10-Year Treasury Rate and mortgage interest rates increased significantly. During the later part of the fourth quarter of 2023, both rates decreased to levels that approximated rates at the beginning of 2023. Average interest rates during the three ~~and nine~~ months ended ~~September 30, 2023, exceeded~~March 31, 2024, increased slightly compared to average interest rates during the same ~~periods~~period in ~~2022.~~2023. Refinancing volume as a percentage of total origination volume was relatively flat during the three months ended ~~September 30, 2023 and decreased during the nine months ended September 30, 2023,~~March 31, 2024, as compared to the same ~~periods~~period in ~~2022.~~2023. Although we anticipate a ~~lower~~relatively stable percentage of refinancing volume relative to total loan origination volume during ~~the year ending in December 31, 2023,~~2024, as compared to ~~the year ended December 31, 2022,~~2023, a higher refinance percentage could be driven by a slowing of purchase volume due to the negative impact on new and existing home sales resulting from existing home inventory shortages and affordability challenges related to new home construction, and/or an increase in all-cash buyers.

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The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements (“ABAs”). For the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, funded volume through ABAs was approximately ~~12%~~18% of the mortgage origination segment’s total loan volume. ~~During March 2023~~

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~~and July 2023, respectively, all of the respective members of two ABAs mutually agreed to dissolve the entities, effective June 2023 and September 2023, respectively.~~ Currently, PrimeLending owns a greater than 50% membership interest in two ABAs. We expect total production within the ABA channel to approximate ~~18%~~16% of loan volume of the mortgage origination segment during the remainder of ~~2023.~~2024.

The following table provides further details regarding our mortgage loan originations and sales for the periods indicated below (dollars in thousands).


	Three Months Ended September 30,										Nine Months Ended September 30,										Three Months Ended March 31,
	2023				2022						2023				2022						2024				2023
			% of				% of			Variance			% of				% of			Variance			% of				% of			Variance
	Amount		Total		Amount		Total			2023 vs 2022	Amount		Total		Amount		Total			2023 vs 2022	Amount		Total		Amount		Total			2024 vs 2023
Mortgage Loan Originations - units		7,353				10,098				(2,745)		21,004				34,407				(13,403)		5,411				5,783				(372)

Mortgage Loan Originations - volume:
Conventional	$	1,403,008	62.53	%	$	1,934,614	63.57	%	$	(531,606)	$	4,038,367	62.82	%	$	6,971,138	65.66	%	$	(2,932,771)	$	1,016,197	60.62	%	$	1,091,835	63.01	%	$	(75,638)
Government		497,055	22.15	%		736,895	24.21	%		(239,840)		1,486,169	23.12	%		2,085,949	19.65	%		(599,780)		400,360	23.88	%		434,549	25.08	%		(34,189)
Jumbo		73,769	3.29	%		198,846	6.53	%		(125,077)		237,304	3.69	%		949,498	8.94	%		(712,194)		64,918	3.87	%		63,485	3.66	%		1,433
Other		269,869	12.03	%		172,856	5.69	%		97,013		666,264	10.37	%		610,329	5.75	%		55,935		195,011	11.63	%		142,884	8.25	%		52,127
	$	2,243,701	100.00	%	$	3,043,211	100.00	%	$	(799,510)	$	6,428,104	100.00	%	$	10,616,914	100.00	%	$	(4,188,810)	$	1,676,486	100.00	%	$	1,732,753	100.00	%	$	(56,267)

Home purchases	$	2,091,444	93.21	%	$	2,832,136	93.06	%	$	(740,692)	$	6,003,749	93.40	%	$	8,927,270	84.09	%	$	(2,923,521)	$	1,548,941	92.39	%	$	1,607,330	92.76	%	$	(58,389)
Refinancings		152,257	6.79	%		211,075	6.94	%		(58,818)		424,355	6.60	%		1,689,644	15.91	%		(1,265,289)		127,545	7.61	%		125,423	7.24	%		2,122
	$	2,243,701	100.00	%	$	3,043,211	100.00	%	$	(799,510)	$	6,428,104	100.00	%	$	10,616,914	100.00	%	$	(4,188,810)	$	1,676,486	100.00	%	$	1,732,753	100.00	%	$	(56,267)

Texas	$	624,953	27.85	%	$	716,764	23.55	%	$	(91,811)	$	1,762,179	27.41	%	$	2,311,567	21.77	%	$	(549,388)	$	577,293	34.43	%	$	496,843	28.67	%	$	80,450
California		176,879	7.88	%		196,502	6.46	%		(19,623)		536,718	8.35	%		921,194	8.68	%		(384,476)		119,208	7.11	%		144,602	8.35	%		(25,394)
South Carolina		119,124	5.31	%		137,628	4.52	%		(18,504)		344,224	5.36	%		480,444	4.53	%		(136,220)		81,610	4.87	%		87,283	5.04	%		(5,673)
Florida		96,945	4.32	%		139,698	4.59	%		(42,753)		308,155	4.79	%		523,442	4.93	%		(215,287)		71,376	4.26	%		90,239	5.21	%		(18,863)
Missouri																						68,434	4.08	%		55,114	3.18	%		13,320
New York																						68,064	4.06	%		70,190	4.05	%		(2,126)
Arizona		84,103	3.75	%		116,535	3.83	%		(32,432)		290,972	4.53	%		473,870	4.46	%		(182,898)		59,190	3.53	%		87,470	5.05	%		(28,280)
New York		101,560	4.53	%		139,381	4.58	%		(37,821)		271,929	4.23	%		432,543	4.07	%		(160,614)
Missouri		79,735	3.55	%		104,914	3.45	%		(25,179)		225,068	3.50	%		346,173	3.26	%		(121,105)
North Carolina																						45,596	2.72	%		55,408	3.20	%		(9,812)
Ohio		71,467	3.19	%		155,904	5.12	%		(84,437)		200,273	3.12	%		469,165	4.42	%		(268,892)		45,502	2.71	%		52,458	3.03	%		(6,956)
North Carolina		67,342	3.00	%		90,287	2.97	%		(22,945)		196,764	3.06	%		325,931	3.07	%		(129,167)
Maryland		57,931	2.58	%		74,493	2.45	%		(16,562)		165,234	2.57	%		269,728	2.54	%		(104,494)
Washington																						44,592	2.66	%		41,084	2.37	%		3,508
All other states		763,662	34.04	%		1,171,105	38.48	%		(407,443)		2,126,588	33.08	%		4,062,857	38.27	%		(1,936,269)		495,621	29.57	%		552,062	31.85	%		(56,441)
	$	2,243,701	100.00	%	$	3,043,211	100.00	%	$	(799,510)	$	6,428,104	100.00	%	$	10,616,914	100.00	%	$	(4,188,810)	$	1,676,486	100.00	%	$	1,732,753	100.00	%	$	(56,267)

Mortgage Loan Sales - volume:
Third parties	$	2,386,552	99.63	%	$	3,289,846	96.20	%	$	(903,294)	$	6,037,382	97.81	%	$	10,818,341	96.93	%	$	(4,780,959)	$	1,717,529	98.15	%	$	1,595,535	96.03	%	$	121,994
Banking segment		8,805	0.37	%		130,104	3.80	%		(121,299)		135,201	2.19	%		343,140	3.07	%		(207,939)		32,328	1.85	%		65,986	3.97	%		(33,658)
	$	2,395,357	100.00	%	$	3,419,950	100.00	%	$	(1,024,593)	$	6,172,583	100.00	%	$	11,161,481	100.00	%	$	(4,988,898)	$	1,749,857	100.00	%	$	1,661,521	100.00	%	$	88,336

We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from the sale of loans, mortgage loan origination fees, and other mortgage production income. Total loan origination volume is a measure utilized by management, our investors, and analysts in assessing market share and growth of the mortgage origination segment.

The mortgage origination segment’s total loan origination volume decreased ~~26.3% and 39.5%~~3.2% during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared to the same ~~periods~~period in ~~2022,~~2023, while loss before income taxes decreased ~~64.3% and increased 327.5%, respectively,~~31.8% during ~~those same periods.~~that time. The decrease in loss before income taxes during the three months ended ~~September 30, 2023,~~March 31, 2024, was primarily due to an increase in the average ~~value of mortgage~~ loan ~~origination fees~~sales margin and decreases in ~~variable compensation,~~ non-variable compensation and benefits expense, variable compensation and segment operating costs, compared to the same period in ~~2022.~~2023. These trends were partially offset by decreases in the volume of IRLCs and mortgage loan originations, ~~and mortgage loans sales,~~ compared to the same period in 2022. The increase in the loss before income taxes during the nine months ended September 30, 2023, was primarily due to decreases in the volume of IRLCs, mortgage loan originations, and mortgage loans sales, compared to the same period in 2022. These trends were partially offset by decreases in variable compensation, and to a lesser extent, decreases in non-variable compensation and benefits expense, compared to the same period in 2022. The net impact of a decrease in the average value of IRLCs and an increase in the average value of mortgage loan origination fees, compared to the same period in 2022, was minimal.2023.

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The information shown in the table below includes certain additional key performance indicators for the mortgage origination segment.


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
		2023		2022		2023			2022			2024			2023
Net gains from mortgage loan sales (basis points):
Loans sold to third parties		199		227			200			271			221			193
Impact of loans retained by banking segment		(1)		(9)			(4)			(8)			(5)			(7)
As reported		198		218			196			263			216			186
Variable compensation as a percentage of total compensation		51.7	%	51.5	%		48.1	%		54.3	%		42.1	%		41.0	%
Mortgage servicing rights asset ($000's) (end of period) ⁽¹⁾						$	104,951		$	156,539		$	95,591		$	103,314

(1)	Reported on a consolidated basis and therefore does not include mortgage servicing rights assets related to loans serviced for the banking segment, which are eliminated in consolidation.

Net interest expense was comprised of interest income earned on loans held for sale offset by interest incurred on warehouse lines of credit primarily held with the Bank, and related intercompany financing costs. ~~The year-over-year change in net~~Net interest expense ~~between~~was relatively flat during the three ~~and nine~~ months ended ~~September 30, 2023 and 2022 reflected~~March 31, 2024, as compared to the ~~effects of decreased net yields on mortgage loans held for sale, partially offset by a decrease~~same period in ~~the average warehouse line balance between each of the periods compared.~~2023.

Noninterest income was comprised of the items set forth in the table below (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Net gains from sale of loans	$	47,494	$	74,696	$	(27,202)	$	120,857	$	293,630	$	(172,773)	$	37,881	$	30,876	$	7,005
Mortgage loan origination fees and other related income		41,478		39,960		1,518		111,695		114,400		(2,705)		26,438		28,777		(2,339)
Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale		(5,774)		(22,163)		16,389		3,719		(59,353)		63,072		4,177		9,690		(5,513)
Mortgage servicing rights asset		(2,987)		(4,146)		1,159		(12,797)		5,490		(18,287)		(10,045)		(7,868)		(2,177)
Servicing fees		8,536		9,853		(1,317)		24,181		27,310		(3,129)		8,249		7,354		895
Total noninterest income	$	88,747	$	98,200	$	(9,453)	$	247,655	$	381,477	$	(133,822)	$	66,700	$	68,829	$	(2,129)

The ~~decreases~~increase in net gains from sale of loans during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared with the same ~~periods~~period in ~~2022, were~~2023, was primarily the result of ~~decreases~~an increase in average loan sale margin, in addition to an increase of ~~30.0% and 44.7%~~5.3% in total loan sales ~~volume, in addition to decreases in average loan sales margin during both periods.~~volume. Since PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, ~~the decreases in~~total loan sales volume during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2024 which increased slightly compared to the same period in 2023, ~~were consistent with decreases in~~approximated total loan origination volume during the ~~periods.~~same period. Total loan origination volume during the three months ended March 31, 2024 decreased slightly compared to the same period in 2023.

The decrease in mortgage loan origination fees during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, compared with the same period in ~~2022,~~2023, was primarily the result of a decrease in loan origination volume ~~partially offset by an increase in~~and average mortgage loan origination fees.

Fluctuations in mortgage loan origination fees and net gains on sale of loans are not always aligned with fluctuations in loan origination and loan sale volumes, respectively, since customers may opt to pay PrimeLending discount fees on their mortgage loans, which are included in mortgage loan origination fees, in exchange for a lower interest rate, which decreases the value of a loan in the secondary market.

We consider the mortgage origination segment’s net gains from sale of loans margin, in basis points, to be a key performance measure. Net gains from mortgage loan sales margin is defined as net gains from sale of loans divided by mortgage loan sales volume. The net gains from sale of loans is central to the segment’s generation of income and may include loans sold to third parties and loans sold to and retained by the banking segment. For origination services provided, the mortgage origination segment was reimbursed direct origination costs associated with loans retained by the banking segment, in addition to payment of a correspondent fee. The reimbursed origination costs and correspondent fees are included in the mortgage origination segment operating results, and the correspondent fees are eliminated in consolidation. Loan volumes to be originated on behalf of and retained by the banking segment are evaluated each quarter. Loans sold to and retained by the banking segment during the three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~ were ~~$8.8~~$32.3 million and ~~$130.1~~$66.0 million, ~~respectively, and $135.2 million and $343.1 million during the nine months ended September 30, 2023 and 2022,~~ respectively. Loan volumes to be originated on behalf of and retained by the banking segment are expected to be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

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Noninterest income included changes in the net fair value of the mortgage origination segment’s IRLCs and loans held for sale and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale (“net fair value of IRLCs and loans held for sale”). The decrease in net fair value of IRLCs and loans held for sale during the three months ended ~~September 30,~~March 31, 2024, compared with the same period in 2023, was primarily the result of a decrease in the ~~total volume~~average value of individual IRLCs and loans held for sale ~~between June 30, 2023~~ and ~~September 30, 2023. The increase in net fair value of IRLCs and loans held for sale during the nine months ended September 30, 2023, was primarily the result of an increase in~~ the total volume of individual IRLCs and loans held for ~~sale, partially offset by a decrease in the average value of IRLCs and loans held for sale, between December 31, 2022 and September 30, 2023.~~sale.

The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market. In addition, the mortgage origination segment originates loans on behalf of the Bank. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage interest rates, refinancing and market activity, and balance sheet positioning at Hilltop. During the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, PrimeLending retained servicing on approximately ~~9% and 20%, respectively,~~10% of the loans sold, compared with approximately ~~45% and 25%, respectively,~~41% of loans sold during the same ~~periods~~period in ~~2022.~~2023. A reduction in third-party mortgage servicers purchasing mortgage servicing rights, even if modest, may result in PrimeLending increasing the rate of retained servicing on mortgage loans sold ~~during the remainder of 2023.~~at any time. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold, servicing released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on certain loans sold to and retained by the banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in consolidation.

The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options and MBS commitments, to mitigate interest rate risk associated with its MSR asset. Changes in the net fair value of the MSR asset and the related derivatives are associated with normal customer payments, changes in discount rates, prepayment speed assumptions and customer payoffs. The operating results of the mortgage origination segment were negatively impacted during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 by ~~an increase of $6.1 million and~~ a decrease of ~~$0.7~~$7.3 million ~~respectively,~~related to a change in the prepayment rates used as inputs to value the MSR asset and to reflect the difference between the MSR carrying value and the sales price reflected in a signed letter of intent (“LOI”) discussed in more detail below, as well as losses of $5.7 million generated by the derivatives used to hedge the MSR. The remaining change in the net fair value of the MSR asset during the period was primarily due to net gains of $2.9 million driven by net changes in long-term U.S. Treasury bond rates and customer payoffs. During the three months ended March 31, 2023, the operating results of the mortgage origination segment were negatively impacted by a decrease of $10.7 million in the net fair value of the MSR asset, of which $5.5 million ~~of the decrease during the nine months ended September 30, 2023,~~ was primarily driven by market sales trends, ~~during the first quarter~~partially offset by a gain of 2023. The remaining fluctuations in the net fair value of the MSR asset during the respective periods were primarily due to the net gains driven by net changes in long-term U.S. Treasury bond rates and customer payoffs during the three and nine months ended September 30, 2023, and losses of $9.1 million and $12.3$2.8 million generated by the derivatives used to hedge the MSR. ~~During June 2023,~~There were no MSR assets sold during the three months ended March 31, 2024 and 2023. On April 9, 2024, the mortgage origination ~~segment sold~~signed an LOI to sell MSR assets of ~~$19.1~~$47 million, which represented ~~$991.0 million~~$3.0 billion of its serviced loan volume at the time. ~~There were no MSR assets sold during the nine months ended September 30, 2022.~~ In addition to gains and losses generated by changes in the net fair value of the MSR asset, net servicing income of ~~$3.7~~$3.6 million ~~and $10.5 million, respectively, were~~was recognized during the three ~~and nine~~ months ended ~~September 30, 2023.~~March 31, 2024.

Noninterest expenses were comprised of the items set forth in the table below (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Variable compensation	$	33,070	$	44,312	$	(11,242)	$	94,892	$	157,079	$	(62,187)	$	22,188	$	25,573	$	(3,385)
Non-variable compensation and benefits		30,946		41,767		(10,821)		102,461		131,954		(29,493)		30,506		36,782		(6,276)
Segment operating costs		21,471		23,479		(2,008)		64,125		72,506		(8,381)		20,284		20,878		(594)
Lender paid closing costs		1,179		3,541		(2,362)		3,741		11,002		(7,261)		1,258		1,175		83
Servicing expense		4,839		5,246		(407)		13,699		13,831		(132)		4,662		4,345		317
Total noninterest expense	$	91,505	$	118,345	$	(26,840)	$	278,918	$	386,372	$	(107,454)	$	78,898	$	88,753	$	(9,855)

Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Historically, variable compensation comprises the majority of total employees’ compensation and benefits expenses, but during the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, non-variable compensation was greater than variable compensation. Variable compensation, which is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume, because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend.

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While total loan origination volume decreased ~~26.3% and 39.5%~~3.2% during the three ~~and nine~~ months ended ~~September 30, 2023, respectively,~~March 31, 2024, compared to the same ~~periods~~period in ~~2022,~~2023, the aggregate non-variable compensation and benefits of the mortgage origination segment decreased by ~~25.9% and 22.4%~~17.1% during the same ~~periods, respectively,~~period. This decrease during the three months ended March 31, 2024, compared to the same ~~periods~~period in ~~2022. These decreases during the three and nine months ended September 30,~~ 2023, ~~compared to the same periods in 2022, were~~was primarily due to a decrease in salaries associated with a reduction in underwriting and loan fulfillment, operations and corporate staff ~~in response~~as PrimeLending continued to the decreases in loan origination volume that started at the end of 2021, and has continued through the third quarter of 2023. Severance costs, included in non-variable compensation above, incurred because of this continued initiative were $0.3 million and $1.2 million, respectively, during the three and nine months ended September 30, 2023. These actions during 2023 are expected to have an aggregate favorable impact on annualized pre-tax expenses of approximately $10 million. PrimeLending remains committed to evaluating staffing levels and maintaining an appropriateevaluate its cost structure to address the ~~dynamic~~current mortgage ~~loan origination trends.~~environment. Segment operating costs decreased during the three ~~and nine~~ months ended ~~September 30, 2023,~~March 31, 2024, compared to the same ~~periods~~period in ~~2022,~~2023, primarily due to decreases in occupancy and equipment expense, ~~advertising expense, professional~~software and licensing fees, and ~~net loan related expenses, excluding credit report expense. An increase in credit report expense primarily driven by increases in vendor individual report costs, partially offset the noted decreases.~~miscellaneous fees.

In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loans (“lender paid closing costs”). Fluctuations in lender paid closing costs are not always aligned with fluctuations in loan origination volume. Other loan pricing conditions, including the mortgage loan interest rate, loan origination fees paid by the customer, and a customer’s willingness to pay closing costs, may influence fluctuations in lender paid closing costs.

Between January 1, ~~2014~~2015 and ~~September 30, 2023,~~March 31, 2024, the mortgage origination segment sold mortgage loans totaling ~~$146.2~~$139.7 billion. These loans were sold under sales contracts that generally include provisions that hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to ~~2014,~~2015, it does not anticipate experiencing significant losses in the future on loans originated prior to ~~2014~~2015 as a result of investor claims under these provisions of its sales contracts.

When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses incurred on the loan.

Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, ~~2014~~2015 and ~~September 30, 2023~~March 31, 2024 (dollars in thousands).


	Original Loan Balance				Loss Recognized				Original Loan Balance				Loss Recognized
			% of				% of				% of				% of
	Amount		Loans Sold		Amount		Loans Sold		Amount		Loans Sold		Amount		Loans Sold
Claims resolved with no payment	$	230,606	0.16	%	$	—	-	%	$	213,604	0.15	%	$	—	-	%
Claims resolved because of a loan repurchase or payment to an investor for losses incurred ⁽¹⁾		285,169	0.20	%		21,686	0.01	%		304,296	0.22	%		24,079	0.02	%
	$	515,775	0.36	%	$	21,686	0.01	%	$	517,900	0.37	%	$	24,079	0.02	%

(1)	Losses incurred include refunded purchased servicing rights.

For each loan, the mortgage origination segment concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment has established a specific claims indemnification liability reserve.

An additional indemnification liability reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim inquiries, claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests.

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Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable. Between March and June 2023 PrimeLending experienced an increase in agency claim inquiries relative to historical trending. However, during the ~~third~~first quarter of ~~2023,~~2024, agency claims decreased to more closely to approximate historical trends. While

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no adjustment has been made to the factors considered in the calculation of the indemnification liability reserve as a result of these trends as of ~~September 30, 2023,~~March 31, 2024, PrimeLending will continue to monitor agency claim inquiry trends and assess its potential impact on the indemnification liability reserve.

At ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, the mortgage origination segment’s total indemnification liability reserve totaled ~~$13.6~~$9.8 million and ~~$20.5~~$11.7 million, respectively. The related provision for indemnification losses was ~~$0.5~~$0.3 million ~~and $0.1 million~~ during both the three months ended ~~September 30,~~March 31, 2024 and 2023, ~~and 2022, respectively, and $1.3 million and $1.3 million during the nine months ended September 30, 2023 and 2022,~~ respectively.

Corporate

The following table presents certain financial information regarding the operating results of corporate (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2023		2022		2023 vs 2022		2023		2022		2023 vs 2022		2024		2023		2024 vs 2023
Net interest income (expense)	$	(3,175)	$	(3,276)	$	101	$	(9,976)	$	(9,856)	$	(120)	$	(3,103)	$	(3,322)	$	219
Noninterest income		3,159		1,809		1,350		8,944		5,655		3,289		5,785		2,704		3,081
Noninterest expense		13,937		14,034		(97)		45,750		44,388		1,362		17,384		15,513		1,871
Loss before income taxes	$	(13,953)	$	(15,501)	$	1,548	$	(46,782)	$	(48,589)	$	1,807	$	(14,702)	$	(16,131)	$	1,429

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company. Hilltop’s merchant banking investment activities include the identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank subsidiary, Hilltop Opportunity Partners LLC. These merchant banking activities currently include investments within various industries, including power generation, ~~consumer services,~~youth sports and entertainment, dental health, industrial equipment manufacturing and animal health, with an aggregate carrying value of approximately ~~$58~~$76 million at ~~September 30, 2023.~~March 31, 2024.

As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest income earned during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.

Interest expense during each of the three months ended ~~September 30,~~March 31, 2024 and 2023 ~~and 2022~~ included recurring quarterly interest expense of $5.0 million incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”), on our $50 million aggregate principal amount of subordinated notes due 2030 (“2030 Subordinated Notes”) and on our $150 million aggregate principal amount of subordinated notes due 2035 (“2035 Subordinated Notes,” the 2030 Subordinated Notes and the 2035 Subordinated Notes, collectively, the “Subordinated Notes”).

Noninterest income during each period included activity related to our investment in a real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary. During the three months ended March 31, 2024, noninterest income included a pre-tax gain of $2.8 million associated with the sale of a merchant bank equity investment.

Noninterest expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. During the three months ended September 30, 2023, noninterest expenses decreased slightly, compared to the same period in 2022, primarily due to declines in professional fees and occupancy expenses, significantly offset by inflationary increases associated with employees’ compensation and benefits. During the nine months ended September 30, 2023,March 31, 2024, noninterest expenses increased, compared to the same period in ~~2022,~~2023, primarily due to ~~inflationary~~ increases associated with employees’ compensation and benefits ~~partially offset by decreases in professional fees~~ and ~~occupancy expenses.~~software costs.

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Financial Condition

The following discussion contains a more detailed analysis of our financial condition at ~~September 30, 2023,~~March 31, 2024, as compared with December 31, ~~2022.~~2023.

Securities Portfolio

At ~~September 30, 2023,~~March 31, 2024, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, as well as ~~mortgage-backed,~~mortgage-

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backed, corporate debt, and equity securities. We may categorize investments as trading, available for sale, held to maturity and equity securities.

Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and the Hilltop Broker-Dealers. Securities classified as available for sale may, from time to time, be bought and sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and to take advantage of market conditions that create more economically attractive returns. Such securities are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Equity investments are carried at fair value, with all changes in fair value recognized in net income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.

The table below summarizes our securities portfolio (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Trading securities, at fair value
U.S. Treasury securities	$	5,488	$	10,466	$	1,247	$	3,736
U.S. government agencies:
Bonds		26,776		20,878		14,513		12,867
Residential mortgage-backed securities		93,285		214,100		155,355		124,768
Collateralized mortgage obligations		159,171		182,717		103,085		86,281
Other		13,423		—		—		13,079
Corporate debt securities		57,707		42,685		56,252		37,569
States and political subdivisions		183,755		260,271		260,700		180,890
Private-label securitized product		29,020		9,265		56,084		47,768
Other		10,276		14,650		10,464		9,033
		578,901		755,032		657,700		515,991
Securities available for sale, at fair value
U.S. Treasury securities		4,491		19,144		4,608		4,617
U.S. government agencies:
Bonds		165,379		202,257		160,114		166,166
Residential mortgage-backed securities		347,850		406,358		347,636		349,870
Commercial mortgage-backed securities		168,020		175,499		190,089		191,746
Collateralized mortgage obligations		726,435		818,894		723,374		736,481
Corporate debt securities		12,000		—		20,814		24,418
States and political subdivisions		32,063		36,614		33,920		34,297
		1,456,238		1,658,766		1,480,555		1,507,595
Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities		283,620		301,583		273,005		278,172
Commercial mortgage-backed securities		173,191		180,942		162,273		172,879
Collateralized mortgage obligations		290,843		314,705		277,859		284,208
States and political subdivisions		77,425		78,302		77,413		77,418
		825,079		875,532		790,550		812,677

Equity securities, at fair value		264		200		315		321
Total securities portfolio	$	2,860,482	$	3,289,530	$	2,929,120	$	2,836,584

We had net unrealized losses of ~~$150.1~~$113.6 million and ~~$129.8~~$114.2 million at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively, related to the available for sale investment portfolio, and net unrealized losses of ~~$121.7~~$87.7 million and ~~$90.2~~$80.8 million at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively, associated with the securities held to maturity

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portfolio. Equity securities included net unrealized gains of ~~$0.2~~$0.3 million and ~~$0.1~~$0.3 million at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively. In future periods, we expect changes in prevailing market interest rates, coupled with changes in the aggregate size of the investment portfolio, to be significant drivers of changes in the unrealized losses or gains in these portfolios, and therefore accumulated other comprehensive income (loss).

~~We transferred certain agency-issued securities from the available-for-sale to held-to-maturity portfolio on March 31, 2022 having a book value~~65

Table of approximately $782 million and a market value of approximately $708 million. As of the date of transfer, the related pre-tax net unrecognized losses of approximately $74 million within the accumulated other comprehensive loss balance are being amortized over the remaining term of the securities using the effective interest method. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding.Contents

Banking Segment

The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale and equity securities portfolios serve as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At ~~September 30, 2023,~~March 31, 2024, the banking segment’s securities portfolio of $2.3 billion was comprised of trading securities of $0.1 million, available for sale securities of ~~$1.4~~$1.5 billion, held to maturity securities of ~~$825.1~~$790.6 million and equity securities of $0.3 million, in addition to ~~$11.7~~$11.8 million of other investments included in other assets within the consolidated balance sheets.

Broker-Dealer Segment

The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio to the statement of operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of ~~$578.8~~$657.6 million at ~~September 30, 2023.~~March 31, 2024. In addition, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligation may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of ~~$51.5~~$60.6 million at ~~September 30, 2023.~~March 31, 2024.

Corporate

At ~~September 30, 2023,~~March 31, 2024, the corporate portfolio included other investments, including those associated with merchant banking, of available for sale securities of ~~$12.0~~$20.8 million and other assets of ~~$38.5~~$44.2 million within the consolidated balance sheets.

Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities

We have evaluated available for sale debt securities that are in an unrealized loss position and have determined that any declines in value are unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at ~~September 30, 2023.~~March 31, 2024. In addition, as of ~~September 30, 2023,~~March 31, 2024, we had evaluated our held to maturity debt securities, considering the current credit ratings and recognized losses, and determined the potential credit loss to be minimal. With respect to these securities, we considered the risk of credit loss to be negligible, and therefore, no allowance was recognized on the debt securities portfolio at ~~September 30, 2023.~~March 31, 2024.

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Loan Portfolio

Consolidated loans held for investment are detailed in the table below, classified by portfolio segment (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Commercial real estate	$	3,285,899	$	3,245,873
Commercial real estate:
Non-owner occupied					$	1,932,746	$	1,889,882
Owner occupied						1,449,249		1,422,234
Commercial and industrial		1,662,737		1,639,980		1,613,301		1,607,833
Construction and land development		1,088,701		980,896		933,405		1,031,095
1-4 family residential		1,783,259		1,767,099		1,773,376		1,757,178
Consumer		26,212		27,602		27,941		27,351
Broker-dealer		357,244		431,223		332,675		344,172
Loans held for investment, gross		8,204,052		8,092,673		8,062,693		8,079,745
Allowance for credit losses		(110,822)		(95,442)		(104,231)		(111,413)
Loans held for investment, net of allowance	$	8,093,230	$	7,997,231	$	7,958,462	$	7,968,332

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Banking Segment

The loan portfolio constitutes the primary earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2023 Form 10-K and further within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” below, the banking segment’s credit policies emphasize strong underwriting and governance standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses.

To manage the credit risks associated with its loan portfolio, management may, depending upon current or anticipated economic conditions and related exposures, apply enhanced risk management measures to loans through analysis of a specific borrower’s financial condition, including cash flow, collateral values, and guarantees, among other credit factors. Given the current market dynamics, including economic uncertainties, the rapid increase in market interest rates since 2022, and a deteriorating outlook for commercial real estate markets, management has heightened its specific review procedures of credits maturing in the next six to twelve months as well as those credits associated with real estate.

The banking segment’s total loans held for investment, net of the allowance for credit losses, were ~~$8.7~~$8.4 billion and $8.5 billion at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively. At ~~September 30, 2023,~~March 31, 2024, the banking segment’s loan portfolio included warehouse lines of credit extended to PrimeLending and its ABAs of ~~$1.6~~$1.3 billion, of which ~~$1.0~~$0.8 billion was drawn. At December 31, ~~2022,~~2023, amounts drawn on the available warehouse lines of credit was $0.9 billion. Amounts advanced against the warehouse lines of credit are eliminated from net loans held for investment on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio.

A significant portion of the banking segment’s loan portfolio at March 31, 2024, consisted of commercial real estate loans secured by properties. Such loans can involve high principal loan amounts, and the repayment of these loans is dependent, in large part, on a borrower’s ongoing business operations or on income generated from the properties that are leased to third parties. The table below sets forth the banking segment’s commercial real estate loan portfolio, by portfolio industry sector and collateral location as of March 31, 2024 (in thousands).


							Brownsville-							Other
	Dallas-						Harlingen-		San						Outside
Commercial Real Estate	Fort Worth		Austin		Houston		McAllen		Antonio		Lubbock		Texas		Texas		Total
Non-owner occupied:
Office	$	148,091	$	213,036	$	44,730	$	16,283	$	21,349	$	2,995	$	58,370	$	325	$	505,179
Retail		150,569		74,664		30,970		16,692		9,907		12,897		41,099		8,906		345,704
Hotel/Motel		48,924		24,835		32,542		17,417		104		18,032		36,006		13,842		191,702
Multifamily		11,231		54,363		41,794		55,341		—		35,939		56,134		10,719		265,521
Industrial		137,262		58,813		9,954		3,337		3,073		668		31,133		419		244,659
All other		108,719		58,404		27,625		12,059		24,018		53,197		61,446		34,513		379,981
	$	604,796	$	484,115	$	187,615	$	121,129	$	58,451	$	123,728	$	284,188	$	68,724	$	1,932,746
Owner occupied:
Office	$	122,533	$	97,539	$	21,803	$	15,192	$	34,681	$	8,064	$	10,701	$	4,019	$	314,532
Retail		10,638		15,458		3,290		1,076		619		167		4,949		992		37,189
Industrial		180,881		36,743		34,175		8,359		12,150		6,992		34,482		22,649		336,431
All other		334,558		75,053		87,570		21,819		50,466		17,419		157,087		17,125		761,097
	$	648,610	$	224,793	$	146,838	$	46,446	$	97,916	$	32,642	$	207,219	$	44,785	$	1,449,249
Total commercial real estate loans	$	1,253,406	$	708,908	$	334,453	$	167,575	$	156,367	$	156,370	$	491,407	$	113,509	$	3,381,995

At ~~September 30, 2023,~~March 31, 2024, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-construction commercial real estate loans, non-construction residential real estate loans, and construction and land development loans, which represented ~~41.9%~~43.8%, ~~22.8%~~23.0% and ~~13.9%~~12.1%, respectively, of the banking segment’s total loans held for investment at ~~September 30, 2023.~~March 31, 2024. The banking segment’s loan concentrations were within regulatory guidelines at ~~September 30, 2023.~~March 31, 2024.

In addition, the Bank’s loan portfolio includes collateralized loans extended to businesses that depend on the energy industry, including those within the exploration and production, field services, pipeline construction and transportation sectors. Crude oil prices remain uncertain given future supply and demand for oil are influenced by international armed conflicts, return to business travel, new energy policies and government regulation, and the pace of transition towards

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renewable energy resources. At ~~September 30, 2023,~~March 31, 2024, the Bank’s energy loan exposure was approximately ~~$53~~$45 million of loans held for investment with unfunded commitment balances of approximately ~~$12~~$18 million. The allowance for credit losses on the Bank’s energy portfolio was ~~$0.1~~$0.2 million, or ~~0.3%~~0.4% of loans held for investment at ~~September 30, 2023.~~March 31, 2024.

The following table provides information regarding the maturities of the banking segment’s gross loans held for investment, net of unearned income (in thousands).

September 30, 2023


Due Within

Due From One

Due from Five

Due After



One Year

To Five Years

To Fifteen Years

Fifteen Years

Total
Commercial real estate

$
828,253

$
1,438,622

$
956,910

$
62,114

$
3,285,899
Commercial and industrial

2,190,430

311,231

144,789

—

2,646,450
Construction and land development

879,115

167,897

40,658

1,031

1,088,701
1-4 family residential

128,782

421,775

446,128

786,574

1,783,259
Consumer

13,607

12,231

360

14

26,212
Total

$
4,040,187

$
2,351,756

$
1,588,845

$
849,733

$
8,830,521

Fixed rate loans

$
1,754,624

$
1,702,763

$
1,330,703

$
849,733

$
5,637,823
Floating rate loans

2,285,563

648,993

258,142

—

3,192,698
Total

$
4,040,187

$
2,351,756

$
1,588,845

$
849,733

$
8,830,521

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	March 31, 2024
	Due Within		Due From One		Due from Five		Due After
	One Year		To Five Years		To Fifteen Years		Fifteen Years		Total
Commercial real estate:
Non-owner occupied	$	668,281	$	949,574	$	314,690	$	201	$	1,932,746
Owner occupied		343,284		535,605		552,284		18,076		1,449,249
Commercial and industrial		1,945,832		349,128		94,005		—		2,388,965
Construction and land development		806,456		104,272		21,780		897		933,405
1-4 family residential		173,999		414,949		424,340		760,088		1,773,376
Consumer		15,643		12,178		107		13		27,941
Total	$	3,953,495	$	2,365,706	$	1,407,206	$	779,275	$	8,505,682

Fixed rate loans	$	1,539,542	$	1,703,077	$	1,147,856	$	779,275	$	5,169,750
Floating rate loans		2,413,953		662,629		259,350		—		3,335,932
Total	$	3,953,495	$	2,365,706	$	1,407,206	$	779,275	$	8,505,682

In the table above, commercial and industrial includes amounts advanced against the warehouse lines of credit extended to PrimeLending. Floating rate loans that have reached their applicable rate floor or ceiling are classified as fixed rate loans rather than floating rate loans. As of ~~September 30, 2023,~~March 31, 2024, floating rate loans totaling ~~$761~~$680 million had reached their applicable rate floor and were expected to reprice, subject to their scheduled repricing timing and frequency terms. The majority of floating rate loans carry an interest rate tied to a SOFR rate or The Wall Street Journal Prime Rate, as published in The Wall Street Journal.

Broker-Dealer Segment

The loan portfolio of the broker-dealer segment consists primarily of margin loans to customers and correspondents that are due within one year. The interest rate on margin accounts is computed on the settled margin balance at a fixed rate established by management. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s total loans held for investment, net of the allowance for credit losses, were ~~$357.1~~$332.6 million and ~~$431.0~~$344.1 million at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, respectively. This decrease from December 31, ~~2022~~2023 to ~~September 30, 2023~~March 31, 2024 was primarily attributable to a decrease of ~~$31.0~~$32.9 million, or ~~20%~~15%, in ~~receivables from correspondents, and a decrease~~customer margin accounts, partially offset by an increase of ~~$43.0~~$19.4 million, or 16%, in ~~customer margin accounts.~~receivables from correspondents.

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Mortgage Origination Segment

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and IRLCs with customers pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
Loans held for sale:
Unpaid principal balance	$	933,626	$	850,277	$	675,546	$	802,348
Fair value adjustment		(143)		5,420		8,530		19,846
	$	933,483	$	855,697	$	684,076	$	822,194
IRLCs:
Unpaid principal balance	$	621,604	$	506,278	$	622,902	$	383,767
Fair value adjustment		2,752		1,767		9,999		7,734
	$	624,356	$	508,045	$	632,901	$	391,501

The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022~~2023 were ~~$1.3~~$1.0 billion and ~~$1.2~~$1.0 billion, respectively, while the related estimated fair values were ~~$11.6~~($1.4) million and ~~$3.3~~($10.2) million, respectively.

Allowance for Credit Losses on Loans

For additional information regarding the allowance for credit losses, refer to the section captioned “Critical Accounting Estimates” set forth in Part II, Item 7 of our ~~2022~~2023 Form 10-K.

Loans Held for Investment

The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan. As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our ~~2022~~2023 Form 10-K, the Bank’s underwriting procedures address financial components based on the size and complexity of the credit, while the Bank’s loan policy provides specific underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans.

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The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. Such future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.

Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts are rapidly changing and remain highly uncertain.

One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of ~~September 30, 2023,~~March 31, 2024, we utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~September 2023.~~March 2024. During our previous quarterly macroeconomic assessment as of ~~June 30,~~December 31, 2023, we also utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~June~~December 2023.

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The following table and paragraphs summarizes the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions used in our economic forecast to determine our best estimate of expected credit losses.


		As of						As of
		September 30,	June 30,	March 31,	December 31,	September 30,		March 31,	December 31,	September 30,	June 30,	March 31,
		2023	2023	2023	2022	2022		2024	2023	2023	2023	2023
GDP growth rates:
	Q3 2022					1.3%	Q1 2023					2.5%
	Q4 2022				0.8%	0.4%	Q2 2023				1.4%	0.4%
	Q1 2023			2.5%	0.1%	0.3%	Q3 2023			2.9%	0.1%	0.4%
	Q2 2023		1.4%	0.4%	(1.4)%	(1.8)%	Q4 2023		1.1%	0.2%	0.3%	(3.1)%
	Q3 2023	2.9%	0.1%	0.4%	(2.5)%	(2.2)%	Q1 2024	2.4%	(1.6)%	(1.9)%	(3.1)%	(2.2)%
	Q4 2023	0.2%	0.3%	(3.1)%	(2.4)%	(2.2)%	Q2 2024	0.7%	(2.4)%	(3.0)%	(2.7)%	(1.1)%
	Q1 2024	(1.9)%	(3.1)%	(2.2)%	0.4%	0.7%	Q3 2024	0.4%	(1.3)%	(1.5)%	(0.9)%	2.1%
	Q2 2024	(3.0)%	(2.7)%	(1.1)%	1.1%		Q4 2024	0.0%	1.3%	1.4%	2.0%
	Q3 2024	(1.5)%	(0.9)%	2.1%			Q1 2025	(1.8)%	2.6%	3.1%
	Q4 2024	1.4%	2.0%				Q2 2025	(2.8)%	3.0%
	Q1 2025	3.1%					Q3 2025	(1.7)%

Unemployment rates:
	Q3 2022					3.7%	Q1 2023					3.5%
	Q4 2022				3.7%	3.9%	Q2 2023				3.5%	3.7%
	Q1 2023			3.5%	4.0%	4.0%	Q3 2023			3.8%	3.8%	4.0%
	Q2 2023		3.5%	3.7%	4.6%	4.6%	Q4 2023		3.8%	4.1%	4.0%	4.7%
	Q3 2023	3.8%	3.8%	4.0%	5.3%	5.5%	Q1 2024	3.8%	4.8%	4.9%	4.9%	5.6%
	Q4 2023	4.1%	4.0%	4.7%	6.0%	6.2%	Q2 2024	4.0%	5.6%	5.7%	5.6%	6.0%
	Q1 2024	4.9%	4.9%	5.6%	5.9%	6.0%	Q3 2024	4.0%	6.1%	6.0%	6.0%	5.7%
	Q2 2024	5.7%	5.6%	6.0%	5.6%		Q4 2024	4.0%	5.6%	5.7%	5.8%
	Q3 2024	6.0%	6.0%	5.7%			Q1 2025	4.8%	5.2%	5.3%
	Q4 2024	5.7%	5.8%				Q2 2025	5.6%	5.0%
	Q1 2025	5.3%					Q3 2025	6.0%

As of ~~September 30, 2023, we updated~~March 31, 2024, our U.S. economic forecast ~~for 2023~~improved as ~~the U.S. economy has remained resilient and~~ real GDP growth ~~from~~was stronger than expected in the prior year. Persistent inflation and higher interest rates for longer continue to weigh on consumer ~~spending~~ and business ~~investment was higher than expected.~~spending resulting in 2.1% below trend economic growth in 2024 and a mild recession in 2025. Labor market conditions ~~are still~~remain tight ~~but improving as~~with a slight increase to the unemployment rate ~~increased~~ to 3.8% ~~during~~in March 2024. Our forecast considers the ~~current quarter. We expect~~potential for tighter monetary policy ~~will remain restrictive~~from the Federal Reserve with the federal funds rate ~~target range between 5.25%~~at 5.8% this year before reverting to 3.7% by year end 2025. The interest rate outlook challenges a slow recovery for residential and ~~5.50% longer~~commercial real estate as ~~a projected mild U.S. recession in 2024 is likely to bring stubborn inflation~~vacancy rates ~~back to the Federal Reserve’s target. Vacancy data~~ for ~~the office properties~~several property sectors trended higher ~~while less demand and tighter financial conditions continue to impact commercial real estate.~~during the quarter.

~~As of~~Since December 31, ~~2022,~~2023, we updated our U.S. economic ~~forecast was updated from September 30, 2022 to reflect higher interest rate expectations~~outlook for recent consumer and ~~slower real~~business spending. Real GDP growth ~~during~~was assumed to contract more modestly (0.0%) on an annual average basis and (1.3%) peak to trough in 2024. Labor market conditions remained tighter than expected as the ~~reasonable and supportable period. The~~unemployment rate decreased to 3.7% in December despite several downward revisions to recent payroll data. We expected monetary policy to remain restrictive at 5.25% to 5.5% in the near term but revert to 3.5% by year end 2025 as the Federal Reserve ~~increased the federal funds rate target twice during the quarter to 4.25% to 4.50%~~balances slower economic growth with its inflation and ~~the quarter’s economic forecast assumed an~~

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average federal funds rate of 5.3% by the second quarter of 2023. As interest rates increased, inflation rates have decreased from historical highs as the goods sector improves; however, we still observed supply chain disruptions especially in the services sector. Unemployment rate forecasts were updated based on then recent economic data as tight labor market conditions continued.

During the three months ended ~~September 30, 2023,~~March 31, 2024, the ~~slight~~ reversal of credit losses reflected improvements to the U.S. economic outlook, ~~and decreases in specific reserves of $0.7 million within our broker dealer segment,~~ offset by increases in specific reserves ~~and net portfolio changes~~ within the banking segment. The provision for credit losses during the nine months ended September 30, 2023, reflected a significant build in the allowance related to loan portfolio changes since the prior quarter and a deteriorating outlook for commercial real estate markets. Specific to the Bank, the net impact to the allowance of changes associated with collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included a reversal of credit losses of ~~$0.3~~$7.0 million, ~~compared to a provision for credit losses of $14.2 million, respectively, on collectively evaluated loans,~~ while the net impact to the allowance of changes associated with individually evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 included a provision for credit losses of ~~$0.9 million and $3.0 million, respectively.~~$4.1 million. The changes in the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 were also impacted by net ~~recoveries of $1.6 million and net~~ charge-offs of ~~$1.7 million, respectively.~~$4.3 million.

~~During 2022, and continuing through the first nine months of 2023,~~As noted above, the impact of changes in the U.S. economic outlook since December 31, 2023 and resulting impact on collectively evaluated loans has resulted in a net ~~build~~reduction in the allowance at ~~September 30, 2023,~~March 31, 2024, compared to ~~both~~ December 31, ~~2022 and December 31, 2021.~~2023. The resulting allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in

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the broker-dealer segment and banking segment mortgage warehouse lending programs, was ~~1.45%~~1.38% and ~~1.27%~~1.47% as of ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022.~~2023. While changes in the U.S. economic outlook have been reflected in our current allowance at ~~September 30, 2023,~~March 31, 2024, uncertainties that include, among others, the uncertain timing, duration and significance of further increases in market interest rates and a worsening macroeconomic forecast could adversely impact borrower cash flows and result in further increases in the allowance during future periods. While all industries could experience adverse impacts, certain of our loan portfolio industry sectors and subsectors, including real estate collateralized by office buildings, have an increased level of risk.

The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending programs, are presented in the following table (dollars in thousands).


					Allowance For						Allowance For
					Credit Losses						Credit Losses
			Total		as a % of				Total		as a % of
	Total		Allowance		Total Loans		Total		Allowance		Total Loans
	Loans Held		for Credit		Held For		Loans Held		for Credit		Held For
September 30, 2023	For Investment		Losses		Investment
Commercial real estate ⁽¹⁾	$	3,285,899	$	69,871	2.13	%
Commercial and industrial ⁽²⁾		1,424,944		19,602	1.38	%
Construction and land development ⁽³⁾		1,088,701		8,970	0.82	%
March 31, 2024							For Investment		Losses		Investment
Commercial real estate:
Non-owner occupied ⁽¹⁾							$	1,932,746	$	39,563	2.05	%
Owner occupied ⁽²⁾								1,449,249		28,737	1.98	%
Commercial and industrial ⁽³⁾								1,416,930		16,452	1.16	%
Construction and land development ⁽⁴⁾								933,405		10,008	1.07	%
Total commercial loans		5,799,544		98,443	1.70	%		5,732,330		94,760	1.65	%

1-4 family residential		1,783,259		11,472	0.64	%		1,773,376		8,744	0.49	%
Consumer		26,212		601	2.29	%		27,941		544	1.95	%
Total retail loans		1,809,471		12,073	0.67	%		1,801,317		9,288	0.52	%

Total commercial and retail loans		7,609,015		110,516	1.45	%		7,533,647		104,048	1.38	%

Broker-dealer		357,244		186	0.05	%		332,675		83	0.02	%
Mortgage warehouse lending		237,793		120	0.05	%		196,371		100	0.05	%
Total loans held for investment	$	8,204,052	$	110,822	1.35	%	$	8,062,693	$	104,231	1.29	%

(1)

Included within commercial real estate non-owner occupied portfolio are loans within the office, retail and ~~retail~~hotel/motel portfolio industry subsectors. At ~~September 30, 2023,~~March 31, 2024, the office and retail loans held for investment balances of approximately ~~$801~~$505 million, $346 million and ~~$375~~$192 million, respectively, had an allowance for credit losses of approximately ~~$30~~$21 million, $4 million and $6$3 million, respectively, and an allowance for credit losses as a % of total loans held for investment of ~~3.8%~~4.2%, 1.3% and ~~1.6%~~1.5%, respectively.

(2)

~~(2)~~Included within commercial real estate owner occupied portfolio are loans within the industrial and office portfolio industry subsectors. At March 31, 2024, the industrial and office loans held for investment balances of approximately $336 million and $315 million, respectively, had an allowance for credit losses of approximately $8 million and $7 million, respectively, and an allowance for credit losses as a % of total loans held for investment of 2.3% and 2.1%, respectively.

(3)

Commercial and industrial portfolio amounts reflect balances excluding banking segment mortgage warehouse lending.

~~(3)~~(4)

Included within construction and land development portfolio are loans within the office and retail portfolio industry subsectors. At ~~September 30, 2023,~~March 31, 2024, the office and retail loans held for investment balances of approximately ~~$45~~$38 million and ~~$21~~$24 million, respectively, had an allowance for credit losses of approximately ~~$0.4~~$0.5 million and ~~$0.3~~$0.4 million, respectively, and an allowance for credit losses as a % of total loans held for investment of ~~0.9%~~1.4% and ~~1.6%~~1.5%, respectively.

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Allowance Model Sensitivity

Our allowance model was designed to capture the historical relationship between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes or macroeconomic variables in isolation may not be indicative of past or future performance. It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because we consider a wide variety of factors and inputs in the allowance for credit losses estimate. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

However, to consider the sensitivity of credit loss estimates to alternative macroeconomic forecasts, we compared the Company’s allowance for credit loss estimates as of ~~September 30, 2023,~~March 31, 2024, excluding margin loans in the broker-dealer segment, and the banking segment mortgage warehouse programs, with modeled results using both upside (“S1”) and downside (“S3”) economic scenario forecasts published by Moody’s Analytics.

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Compared to our economic forecast, the upside scenario assumes the economic impacts from international armed conflicts and global supply chain concerns recede faster than expected. Real GDP is expected to grow ~~3.8%~~3.9% in the second quarter of 2024, 3.4% in the third quarter of 2024, 3.3% in the fourth quarter of ~~2023,~~2024, and 3.6% in the first quarter of ~~2024, 3.3% in the second quarter of 2024, and 3.2% in the third quarter of 2024.~~2025. Average unemployment rates are expected to decline to 3.1% by the ~~first~~third quarter of 2024 before reverting to historical data. Inflation is expected to trend back toward the Federal Reserve’s target sooner than expected and we expect the federal funds rate to peak at 5.3% during ~~2023.~~2024.

Compared to our economic forecast, the downside scenario assumes the Federal Reserve’s efforts to resolve bank failures are not successful at restoring consumer and business confidence, causing banks to tighten lending standards while the Fed keeps the federal funds rate elevated due to inflation concerns. The international armed conflicts persist longer than anticipated and global supply chain issues worsen causing weaker manufacturing, increased good shortages, and the economy to fall back into recession. Real GDP is expected to decrease ~~3.3%~~3.2% in the ~~fourth~~second quarter of ~~2023, 3.4%~~2024, 3.6% in the ~~first~~third quarter of 2024, and ~~3.6%~~3.5% in the ~~second~~fourth quarter of 2024. Average unemployment rates are expected to increase to 7.7% by the second quarter of 2025, and to 6.0% by the fourth quarter of ~~2024, but improve to 6.5% by year-end 2025~~2026 and then revert back to historical average rates over time. The Federal Reserve reduces the federal funds rate to support the economy to a ~~1.1%~~0.9% target by the ~~third~~first quarter of ~~2025.~~2026. Disagreements in Congress prevent any additional fiscal measures to stem the recession.

The impact of applying all of the assumptions of the upside economic scenario during the reasonable and supportable forecast period would have resulted in a decrease in the allowance for credit losses of approximately ~~$35~~$28 million or a weighted average expected loss rate of 1.0% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending programs.

The impact of applying all of the assumptions of the downside economic scenario during the reasonable and supportable forecast period would have resulted in an increase in the allowance for credit losses of approximately ~~$47~~$46 million or a weighted average expected loss rate of ~~2.1%~~1.9% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending programs.

This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for credit losses as they do not reflect any potential changes in the adjustment to the quantitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these modeled lifetime loss estimates based on then-current circumstances and conditions.

Our allowance for credit losses reflects our best estimate of current expected credit losses, which is highly dependent on several assumptions, including the macroeconomic outlook, inflationary pressures and labor market conditions, international armed conflicts and their impact on supply chains, the U.S elections and ~~uncertain impacts from bank failures during early 2023.~~other various fiscal and monetary policy decisions. The sensitivity of many of these assumptions are often correlated and nonlinear so these results should not be simply extrapolated to estimate the allowance for credit losses accurately for more severe changes in economic scenarios. Future allowance for credit losses may vary considerably for these reasons.

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Allowance Activity

The following table presents the activity in our allowance for credit losses and selected credit metrics within our loan portfolio for the periods presented (in thousands). Substantially all of the activity shown within the allowance for credit losses below occurred within the banking segment.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
Loans Held for Investment	2023			2022			2023			2022
													2024			2023
Loans Held for Investment:
Balance, beginning of period	$	109,306		$	95,298		$	95,442		$	91,352		$	111,413		$	95,442
Provision for (reversal of) credit losses		(40)			(780)			17,127			4,671			(2,871)			2,331
Recoveries of loans previously charged off:
Commercial real estate		10			41			41			84
Commercial real estate:
Non-owner occupied														—			—
Owner occupied														9			11
Commercial and industrial		2,505			370			3,285			2,004			342			692
Construction and land development		—			—			—			—			1			—
1-4 family residential		33			23			85			71			11			17
Consumer		130			90			215			221			37			39
Broker-dealer		—			—			—			—			—			—
Total recoveries		2,678			524			3,626			2,380			400			759
Loans charged off:
Commercial real estate		34			—			1,011			—
Commercial real estate:
Non-owner occupied														1,647			—
Owner occupied														—			977
Commercial and industrial		936			3,096			4,015			6,197			2,983			59
Construction and land development		—			—			—			—			—			—
1-4 family residential		—			14			73			62			—			73
Consumer		152			149			274			361			81			69
Broker-dealer		—			—			—			—			—			—
Total charge-offs		1,122			3,259			5,373			6,620			4,711			1,178
Net recoveries (charge-offs)		1,556			(2,735)			(1,747)			(4,240)			(4,311)			(419)
Balance, end of period	$	110,822		$	91,783		$	110,822		$	91,783		$	104,231		$	97,354

Average total loans for the period	$	7,972,604		$	7,911,833		$	7,967,075		$	7,863,257
Average loans held for investment for the period													$	7,835,647		$	7,894,668
Total loans held for investment (end of period)							$	8,204,052		$	7,944,246		$	8,062,693		$	8,192,846
Ratios:

Loans Held for Sale:
Average loans held for sale for the period													$	802,098		$	815,393
Total loans held for sale (end of period)													$	842,324		$	1,040,138

Selected Credit Metrics:
Net recoveries (charge-offs) to average total loans held for investment ⁽¹⁾		0.08	%		(0.14)	%		(0.03)	%		(0.07)	%		(0.22)	%		(0.02)	%
Non-accrual loans to total loans held for investment (end of period)								0.34	%		0.37	%
Non-accrual loans:
Loans held for investment (end of period)													$	28,655		$	23,098
Loans held for sale (end of period)													$	36,081		$	4,280
Non-accrual loans to total loans (end of period)														0.73	%		0.30	%
Allowance for credit losses on loans held for investment to:
Total loans (end of period)														1.17	%		1.05	%
Total loans held for investment (end of period)								1.35	%		1.16	%		1.29	%		1.19	%
Total non-accrual loans (end of period)														161.01	%		355.59	%
Non-accrual loans held for investment (end of period)								401.98	%		309.26	%		363.74	%		421.48	%

(1)	Net recoveries (charge-offs) to average total loans held for investment ratio presented on a consolidated basis for all periods given relative immateriality of resulting measure by loan portfolio segment.

Total non-accrual loans increased by $2.0 million from December 31, 2022 to September 30, 2023. This change in non-accrual loans was impacted by loans secured by residential real estate within our mortgage origination segment, which were classified as loans held for sale, of $3.9 million and $4.8 million at September 30, 2023 and December 31, 2022, respectively.

~~In addition to changes in~~ non-accrual loans classified as loans held for ~~sale, the remaining increase in non-accrual loans during~~investment decreased by $35.7 million from December 31, 2023 to March 31, 2024. This decrease was primarily due to the ~~addition~~reclassification of a single ~~commercial real estate owner occupied~~ loan ~~a single commercial real estate non-owner occupied loan,~~from loans held for investment to loans held for sale, for which the non-accrual status was retained, as well as decreases in construction and ~~four~~land development loans and decreases in 1-4 family residential loans, partially offset by the addition of thirteen commercial and industrial loans to non-accrual ~~status, partially offset by decreases in 1-4 family residential loans.~~status.

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As previously discussed in detail within this section, the allowance for credit losses has fluctuated from period to period, which impacted the resulting ratios noted in the table above. The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our loan portfolio are presented in the table below (dollars in thousands).


	September 30, 2023				December 31, 2022				March 31, 2024				December 31, 2023
			% of				% of				% of				% of
Allocation of the Allowance for Credit Losses	Reserve		Gross Loans		Reserve		Gross Loans		Reserve		Gross Loans		Reserve		Gross Loans
Commercial real estate	$	69,871	40.05	%	$	63,255	40.11	%
Commercial real estate:
Non-owner occupied										39,563	23.97	%		40,061	23.39	%
Owner occupied										28,737	17.97	%		28,114	17.60	%
Commercial and industrial		19,722	20.27	%		16,035	20.26	%		16,552	20.01	%		20,926	19.90	%
Construction and land development		8,970	13.27	%		6,051	12.12	%		10,008	11.58	%		12,102	12.76	%
1-4 family residential		11,472	21.74	%		9,313	21.84	%		8,744	21.99	%		9,461	21.75	%
Consumer		601	0.32	%		554	0.34	%		544	0.35	%		648	0.34	%
Broker-dealer		186	4.35	%		234	5.33	%		83	4.13	%		101	4.26	%
Total	$	110,822	100.00	%	$	95,442	100.00	%	$	104,231	100.00	%	$	111,413	100.00	%

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The following table summarizes historical levels of the allowance for credit losses on loans held for investment, distributed by portfolio segment (in thousands).


	September 30,		June 30,		March 31,		December 31,		September 30,		March 31,		December 31,		September 30,		June 30,		March 31,
	2023		2023		2023		2022		2022		2024		2023		2023		2023		2023
Commercial real estate	$	69,871	$	71,462	$	61,521	$	63,255	$	63,200
Commercial real estate:
Non-owner occupied											$	39,563	$	40,061	$	40,433	$	43,582	$	38,667
Owner occupied												28,737		28,114		29,438		27,880		22,854
Commercial and industrial		19,722		17,315		16,615		16,035		16,108		16,552		20,926		19,722		17,315		16,615
Construction and land development		8,970		7,395		5,999		6,051		4,768		10,008		12,102		8,970		7,395		5,999
1-4 family residential		11,472		11,618		11,691		9,313		6,612		8,744		9,461		11,472		11,618		11,691
Consumer		601		615		563		554		574		544		648		601		615		563
Broker-dealer		186		901		965		234		521		83		101		186		901		965
	$	110,822	$	109,306	$	97,354	$	95,442	$	91,783	$	104,231	$	111,413	$	110,822	$	109,306	$	97,354

Unfunded Loan Commitments

In order to estimate the allowance for credit losses on unfunded loan commitments, the Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion. The allowance is based on the estimated exposure at default, multiplied by the lifetime probability of default grade and loss given default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. Letters of credit are not currently reserved because they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2023		2022		2023		2022		2024		2023
Balance, beginning of period	$	7,992	$	6,931	$	7,784	$	5,880	$	8,876	$	7,784
Other noninterest expense		559		87		767		1,138		(580)		(979)
Balance, end of period	$	8,551	$	7,018	$	8,551	$	7,018	$	8,296	$	6,805

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial ~~difficulties.~~difficulties or whether repayment may depend on collateral or other risk

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mitigation. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. Potential problem loans ~~are~~include those loans assigned a grade of special mention and substandard accrual within our risk grading matrix. Potential problem loans do not include purchased credit deteriorated (“PCD”) loans because PCD loans exhibited evidence of more than insignificant credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected. ~~Within our loan portfolio,~~

At March 31, 2024, we had ~~five~~$210.8 million of potential problem loans, compared to $207.4 million at December 31, 2023. Our potential problem loans designated as substandard accrual at March 31, 2024 and December 31, 2023, totaled $165.3 million and $204.1 million, respectively. The decrease from December 31, 2023 to March 31, 2024 was primarily attributable to decreases in commercial and industrial loans, construction and land development loans and commercial real estate non-owner occupied, partially offset by an increase in commercial real estate owner occupied loans. Of the $165.3 million of potential problem loans designated as substandard accrual at March 31, 2024, $65.2 million, $39.0 million and $36.2 million were associated with commercial and industrial, commercial real estate owner occupied and commercial real estate non-owner occupied loans.

Potential problem loans designated as special mention were comprised of seven credit ~~relationship~~relationships totaling ~~$35.4~~$45.5 million at March 31, 2024, compared with three credit relationships totaling $3.2 million at December 31, 2023. Of the $45.5 million of potential problem loans at ~~September 30, 2023, compared with four credit relationships totaling $4.0 million of potential problem loans at December~~March 31, ~~2022. Of the $35.4 million of potential problem loans at September 30, 2023, $32.3~~2024, $41.0 million was associated with ~~a single~~two credit ~~relationship.~~relationships.

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Non-Performing Assets

The following table presents components of our non-performing assets (dollars in thousands).

September 30,

December 31,


2023

2022

Variance

Loans accounted for on a non-accrual basis:





Commercial real estate

$
7,339

$
4,269

$
3,070

Commercial and industrial

10,190

9,095

1,095

Construction and land development

760

198

562

1-4 family residential

13,202

15,941

(2,739)

Consumer

7

14

(7)

Broker-dealer

—

—

—

$
31,498

$
29,517

$
1,981

Troubled debt restructurings included in accruing loans held for investment ⁽¹⁾

—

803

(803)

Non-performing loans ⁽¹⁾

$
31,498

$
30,320

$
1,178

Non-performing loans as a percentage of total loans ⁽¹⁾

0.34
%

0.33
%

0.01
%

Other real estate owned

$
5,386

$
2,325

$
3,061

Other repossessed assets

$
—

$
—

$
—

Non-performing assets ⁽¹⁾

$
36,884

$
32,645

$
4,239

Non-performing assets as a percentage of total assets ⁽¹⁾

0.22
%

0.20
%

0.02
%

Loans past due 90 days or more and still accruing

$
106,346

$
92,099

$
14,247

~~(1)~~

Effective January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2022-02 which eliminated the recognition and measurement guidance on troubled debt restructurings for creditors. Therefore, we no longer present troubled debt restructurings as a component of non-performing loans and assets.


	March 31,			December 31,
	2024			2023			Variance
Loans accounted for on a non-accrual basis:
Commercial real estate:
Non-owner occupied	$	34,661		$	36,440		$	(1,779)
Owner occupied		4,846			5,098			(252)
Commercial and industrial		12,165			9,502			2,663
Construction and land development		698			3,480			(2,782)
1-4 family residential		12,363			13,801			(1,438)
Consumer		3			6			(3)
Broker-dealer		—			—			—
Non-accrual loans	$	64,736		$	68,327		$	(3,591)

Non-accrual loans as a percentage of total loans		0.73	%		0.76	%		(0.03)	%

Other real estate owned	$	5,254		$	5,095		$	159

Other repossessed assets	$	472		$	—		$	472

Non-performing assets	$	70,462		$	73,422		$	(2,960)

Non-performing assets as a percentage of total assets		0.43	%		0.45	%		(0.02)	%

Loans past due 90 days or more and still accruing	$	112,799		$	115,090		$	(2,291)

At ~~September 30, 2023,~~March 31, 2024, non-accrual loans included 3642 commercial and industrial relationships with loans secured by ~~notes~~accounts receivable, ~~accounts~~notes receivable and equipment. Non-accrual loans at ~~September 30, 2023~~March 31, 2024 also included ~~$3.9~~$36.1 million of loans secured by residential and commercial real estate which were classified as loans held for sale. At December 31, ~~2022,~~2023, non-accrual loans included 40 commercial and industrial relationships with loans secured primarily by notes receivable, accounts receivable ~~automobiles, equipment~~ and ~~notes receivable.~~equipment. Non-accrual loans at December 31, ~~2022~~2023 also included ~~$4.8~~$4.0 million of loans secured by residential real estate which were classified as loans held for sale.

OREO increased from December 31, ~~2022~~2023 to ~~September 30, 2023,~~March 31, 2024, primarily due to additions totaling ~~$5.1~~$2.8 million, ~~partially~~significantly offset by disposals and valuation adjustments totaling $2.0 million. At both ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, OREO was primarily comprised of commercial properties.

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Loans past due 90 days or more and still accruing at ~~September 30, 2023~~March 31, 2024 and December 31, ~~2022,~~2023, were primarily comprised of loans held for sale and guaranteed by U.S. government agencies, including GNMA related loans subject to repurchase within our mortgage origination segment. As of ~~September 30, 2023, $29.0~~March 31, 2024, $0.7 million of loans subject to repurchase under a forbearance agreement had delinquencies on or after April 2020.

Deposits

The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investments in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail within the section titled “Liquidity and Capital Resources — Banking Segment” below, is constantly changing due to the banking segment’s needs and market conditions. Currently, the banking segment is facing intense competition for its deposit base as customers seek higher yields on deposits. Consistent with the consolidated trend in average rates paid on interest-bearing deposits noted in the table below, the banking segment’s average rate paid on interest-bearing deposits during the three ~~and nine~~ months ended ~~September 30, 2023~~March 31, 2024 was ~~3.86% and 3.33%~~3.93%, ~~respectively,~~ compared to ~~3.50%~~3.98% during the three months ended ~~June 30,~~December 31, 2023 and ~~0.95%~~2.56% during the three months ended ~~September 30, 2022.~~ March 31, 2023.

Given the rising interest rate environment since the first quarter of 2022 and the intense competition for deposits in its market area, the Bank’s cumulative interest-bearing deposit pricing beta, excluding deposits from the Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 66 percent. The deposit pricing beta represents the change in interest-bearing deposit pricing in response to a change in market interest rates. The historical interest-bearing deposit pricing beta for the Bank, excluding deposits from our Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 52 percent. We expect that the Bank’s ~~costs~~cost related to interest-bearing deposits ~~will~~during 2024 to continue to ~~increase during the remainder of 2023.~~be driven by various factors, including competition as well as economic and market area factors.

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The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).


	Nine Months Ended September 30,								Three Months Ended March 31,
	2023				2022				2024				2023
	Average		Average		Average		Average		Average		Average		Average		Average
	Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid
Noninterest-bearing demand deposits	$	3,557,765	0.00	%	$	4,534,513	0.00	%	$	2,951,357	0.00	%	$	3,789,757	0.00	%
Interest-bearing deposits:
Demand		6,324,203	2.76	%		6,436,557	0.38	%		6,279,614	3.55	%		6,049,484	2.07	%
Savings		289,191	1.05	%		336,617	0.12	%		253,493	1.19	%		305,873	0.82	%
Time		1,012,175	2.90	%		925,383	0.54	%		1,215,526	4.24	%		884,199	1.99	%
		7,625,569	2.71	%		7,698,557	0.39	%		7,748,633	3.58	%		7,239,556	2.01	%
Total deposits	$	11,183,334	1.85	%	$	12,233,070	0.24	%	$	10,699,990	2.59	%	$	11,029,313	1.32	%

The table above includes interest-bearing brokered deposits with balances of approximately $166 million at March 31, 2024, compared with approximately $208 million at December 31, 2023. As previously discussed, to bolster our liquidity position given banking sector uncertainties in early 2023, we increased brokered deposits at the Bank by approximately $390 million during the second quarter of 2023, with a remaining balance of approximately $160 million at March 31, 2024, of which approximately $150 million matured in April 2024. The variability in the level of brokered deposits has been, and will continue to be, managed through asset/liability strategy and policies that address diversification of funding sources and market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time. As of March 31, 2024, brokered deposits carried an average weighted interest rate of 5.53% and an average remaining term of less than 30 days.

At ~~September 30, 2023,~~March 31, 2024, total estimated uninsured deposits were ~~$4.4~~$4.8 billion, or approximately ~~40%~~44% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of ~~$276.3~~$360.5 million, were ~~$4.2~~$4.5 billion, or approximately ~~37%~~41% of total deposits. Total estimated uninsured deposits were ~~$4.1~~$4.7 billion, or approximately ~~36%~~42% of total deposits, as of December 31, ~~2022.~~2023.

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The following table presents the scheduled maturities of the portion of our time deposits that are in excess of the FDIC insurance limit of $250,000 as of ~~September 30, 2023~~March 31, 2024 (in thousands).


Months to maturity:
3 months or less	$	40,560	$	209,446
3 months to 6 months		200,492		149,082
6 months to 12 months		152,237		116,164
Over 12 months		39,226		69,781
	$	432,515	$	544,473

Borrowings

Our consolidated borrowings are shown in the table below (dollars in thousands).


	September 30, 2023				December 31, 2022						March 31, 2024				December 31, 2023
			Average				Average						Average				Average
	Balance		Rate Paid		Balance		Rate Paid		Variance		Balance		Rate Paid		Balance		Rate Paid		Variance
Short-term borrowings	$	882,999	4.71	%	$	970,056	2.27	%	$	(87,057)	$	892,574	4.74	%	$	900,038	4.75	%	$	(7,464)
Notes payable		347,020	4.31	%		346,654	4.33	%		366		347,273	4.15	%		347,145	4.27	%		128
	$	1,230,019	4.62	%	$	1,316,710	2.86	%	$	(86,691)	$	1,239,847	4.58	%	$	1,247,183	4.64	%	$	(7,336)

Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the FHLB, short-term bank loans and commercial paper. The decrease in short-term borrowings at ~~September 30, 2023,~~March 31, 2024, compared with December 31, ~~2022,~~2023, primarily reflected decreases in ~~short term bank loans~~federal funds purchased by the banking segment and securities sold under agreements to repurchase by the broker-dealer segment, partially offset by an increase in ~~federal funds purchased.~~commercial paper by the broker-dealer segment. Notes payable at ~~September 30, 2023~~March 31, 2024 was comprised of ~~$149.4~~$149.5 million related to the Senior Notes, net of loan origination fees, and Subordinated Notes, net of origination fees, of ~~$197.6~~$197.7 million.

Liquidity and Capital Resources

Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s primary investment objectives, as a holding company, are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and stock repurchases. At ~~September 30, 2023,~~March 31, 2024, Hilltop had ~~$198.9~~$177.0 million in cash and cash equivalents, ~~an increase~~a decrease of ~~$26.4~~$14.6 million from ~~$172.5~~$191.6 million at December 31, ~~2022.~~2023. This ~~increase~~decrease in cash and cash equivalents ~~included the receipt of $70.5 million of dividends from subsidiaries, partially offset by~~was primarily due to cash outflows of ~~$31.2~~$11.1 million in cash dividends declared, ~~$4.5~~$9.9 million in stock repurchases and other general corporate ~~expenses.~~expenses, partially offset by the receipt of $23.1 million of dividends from subsidiaries. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. We believe that Hilltop’s liquidity is sufficient for the foreseeable future,

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with current short-term liquidity needs including operating expenses, interest on debt obligations, dividend payments to stockholders and potential stock repurchases.

As discussed in more detail below, our Senior Notes mature in May 2025 and we have the ability to redeem the 2030 Subordinated Notes, in whole or in part, beginning in May 2025. We continue to evaluate our options and may choose to refinance and/or utilize available cash on hand to satisfy such existing indebtedness. Although it is difficult in the current economic environment to predict the terms and conditions of financing that may be available in the future, we believe that we have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets to refinance or repay our Senior Notes.

Economic Environment

As previously discussed, operational and financial headwinds during ~~2022 and continuing through the first nine months of~~ 2023 have had, and are expected to continue to have, an adverse impact on our operating results during ~~the remainder of 2023.~~2024. The impacts of noted headwinds ~~during the remainder of 2023~~in 2024 are highly uncertain and will depend on several developments outside of our control, including, among others, the timing and significance of further changes in U.S. treasury yields and mortgage interest rates, exposure to increasing funding costs, inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, and international armed conflicts and their impact on supply chains. In addition, during March 2023, the banking sector experienced increased uncertainty and concerns associated with its liquidity positions as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships primarily due to bank failures during early 2023. As demonstrated during both the extreme volatility and disruptions in

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the capital and credit markets beginning in March 2020 resulting from the pandemic ~~crisis~~ and ~~its~~banking sector-related uncertainty and concerns associated with liquidity primarily due to high-profile bank failures during early 2023 and their respective negative ~~impact~~impacts on the economy, we will continue to monitor the economic environment and evaluate appropriate actions to enhance our financial flexibility, protect capital, minimize losses and ensure target liquidity levels.

Dividend Declaration

Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation of our earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors.

Stock Repurchases

In January ~~2023,~~2024, our board of directors authorized a new stock repurchase program through January ~~2024,~~2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the ~~nine~~three months ended ~~September 30, 2023,~~March 31, 2024, Hilltop paid ~~$4.5~~$9.9 million to repurchase an aggregate of ~~144,403~~320,042 shares of our common stock at an average price of ~~$31.15~~$31.04 per share pursuant to the stock repurchase program.

Senior Notes due 2025

The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At ~~September 30, 2023,~~March 31, 2024, $150.0 million of our Senior Notes was outstanding.

Subordinated Notes due 2030 and 2035

On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150 million aggregate principal amount of 2035 Subordinated ~~Notes.~~Notes that mature on May 15, 2030 and May 15, 2035, respectively. The price to the public for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million.

~~The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively.~~ We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.

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The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears. At ~~September 30, 2023,~~March 31, 2024, $200.0 million of our Subordinated Notes was outstanding.

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Regulatory Capital

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including conservation buffer ratio in effect at ~~September 30, 2023~~March 31, 2024 (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of ~~September 30, 2023~~March 31, 2024 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary ~~period.~~period through December 31, 2024.


					Minimum Capital								Minimum Capital
					Requirements Including		To Be Well						Requirements Including		To Be Well
	September 30, 2023				Conservation Buffer		Capitalized		March 31, 2024				Conservation Buffer		Capitalized
	Amount		Ratio		Ratio		Ratio		Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,438,971	10.62	%	4.0	%	5.0	%	$	1,430,850	11.00	%	4.0	%	5.0	%
Hilltop		1,954,422	11.92	%	4.0	%	N/A			1,980,114	12.49	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,438,971	15.31	%	7.0	%	6.5	%		1,430,850	15.87	%	7.0	%	6.5	%
Hilltop		1,954,422	18.60	%	7.0	%	N/A			1,980,114	19.73	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,438,971	15.31	%	8.5	%	8.0	%		1,430,850	15.87	%	8.5	%	8.0	%
Hilltop		1,954,422	18.60	%	8.5	%	N/A			1,980,114	19.73	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,546,036	16.45	%	10.5	%	10.0	%		1,538,101	17.06	%	10.5	%	10.0	%
Hilltop		2,262,945	21.54	%	10.5	%	N/A			2,287,216	22.79	%	10.5	%	N/A

We discuss regulatory capital requirements in more detail in Note 16 to our consolidated financial statements, as well as under the caption “Government Supervision and Regulation — Corporate — Capital Adequacy Requirements and BASEL III” set forth in Part I, Item 1, of our ~~2022~~2023 Form 10-K.

Banking Segment

Within our banking segment, our primary uses of cash are for customer withdrawals and extensions of credit as well as our borrowing costs and other operating expenses. Our corporate treasury group is responsible for continuously monitoring our liquidity position to ensure that our assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Our goal is to manage our liquidity position in a manner such that we can meet our customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan

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demand without penalizing earnings. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity

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needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered time deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.

The above sources of liquidity allow the banking segment to meet increased liquidity demands without adversely affecting daily operations. The Bank’s borrowing capacity through access to secured funding sources is summarized in the following table (in millions). Available liquidity noted below does not include borrowing capacity available through the discount window at the Federal Reserve.


	September 30,		December 31,		March 31,		December 31,
	2023		2022		2024		2023
FHLB capacity	$	4,387	$	4,139	$	4,187	$	4,205
Investment portfolio (available)		1,588		1,606		1,477		1,594
Fed deposits (excess daily requirements)		1,326		1,332		1,508		1,612
	$	7,301	$	7,077	$	7,172	$	7,411

As previously discussed, the banking sector experienced increased uncertainty and concerns associated with its liquidity positions primarily due to high-profile bank failures during early 2023 as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. As a result, both regulatory scrutiny and market focus on liquidity increased. These failures underscore the importance of maintaining access to diverse sources of funding. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs are maintained. During 2023, we began increasing interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. At ~~September 30, 2023,~~March 31, 2024, the Bank also accessed and included ~~additional~~approximately $750 million of core deposits on its balance sheet ~~of approximately $300 million~~ from our Hilltop Securities FDIC-insured sweep program, while the Bank is not utilizing any of its FHLB borrowing capacity noted above through the use of short-term borrowings.

Further, to bolster our liquidity position, we increased brokered deposits at the Bank by approximately $390 million during the second quarter of 2023, bywith a remaining balance of approximately ~~$390 million.~~$160 million at March 31, 2024, of which approximately $150 million matured in April 2024. To date, we have not leveraged the discount window at the Federal Reserve or the BTFP.

Within our banking segment, deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. An economic recovery and improved commercial real estate investment outlook may result in an outflow of deposits at an accelerated pace as customers utilize such available funds for expanded operations and investment opportunities. The Bank regularly evaluates its deposit products and pricing structures relative to the market to maintain competitiveness over time. Currently, the Bank is facing significant competition from bank and non-bank competitors for its deposit base and expects that its interest expense on certain deposits will continue to increase during ~~2023~~2024 and will continue to be driven by various factors, including competition as ~~customers seek higher yields on deposits.~~well as economic and market area factors.

The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for ~~8.67%~~12.35% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for ~~3.95%~~7.32% of the Bank’s total deposits at ~~September 30, 2023.~~March 31, 2024. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.

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Broker-Dealer Segment

The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and noninterest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financing, commercial paper issuances and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net capital and customer protection rules. At ~~September 30, 2023,~~March 31, 2024, Hilltop Securities had credit arrangements with two unaffiliated banks, with maximum aggregate commitments of up to $425.0 million. These credit arrangements are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. In addition, Hilltop Securities has committed revolving credit facilities with two

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unaffiliated banks, with aggregate availability of up to $200.0 million. At ~~September 30, 2023,~~March 31, 2024, Hilltop Securities had no borrowings under its credit arrangements or under its credit facilities.

Hilltop Securities uses the net proceeds (after deducting related issuance expenses) from the sale of two commercial paper programs for general corporate purposes, including working capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under two separate programs, Series 2019-1 CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. As of ~~September 30, 2023,~~March 31, 2024, the weighted average maturity of the CP Notes was ~~133~~139 days at a rate of ~~6.22%~~6.15% with a weighted average remaining life of 6579 days. At ~~September 30, 2023,~~March 31, 2024, the aggregate amount outstanding under these secured arrangements was ~~$208.3~~$221.1 million, which was collateralized by securities held for Hilltop Securities accounts valued at ~~$231.7~~$245.7 million.

Mortgage Origination Segment

PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank, which had a total commitment of ~~$1.5~~$1.2 billion, of which ~~$950~~$735.5 million was drawn at ~~September 30, 2023.~~March 31, 2024. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, historically with the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with an unaffiliated bank of up to $1.0 million, of which no borrowings were drawn at ~~September 30, 2023.~~March 31, 2024.

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”) which holds a controlling ownership interest in and is the managing member of certain ABAs. At ~~September 30, 2023,~~March 31, 2024, these ABAs had combined available lines of credit totaling ~~$95.0 million, $30.0 million of which was with a single unaffiliated bank, and the remaining~~ $65.0 ~~million of which was with the Bank. At September 30, 2023, Ventures Management had outstanding borrowings of $37.5~~ million, all of which was with the ~~Bank. On September 14, 2023, Ventures Management provided a thirty-day notice to the unaffiliated bank to terminate the $30.0 million line~~Bank, with outstanding borrowings of credit. Once this line is terminated, ABA lines of credit will total $65.0 million, all with the Bank. This $65.0 million balance reflects a September 2023 increase of $20 million in ABA available lines of credit with the Bank to partially offset the elimination of the unaffiliated bank line of credit.$46.4 million.

Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees

Since December 31, ~~2022,~~2023, there have been no material changes in other material contractual obligations disclosed within the section captioned “Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees” set forth in Part II, Item 7 of our ~~2022~~2023 Form 10-K.

Additionally, in the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

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Banking Segment

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

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Broker-Dealer Segment

The Hilltop Broker-Dealers execute, settle and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

Impact of Inflation and Changing Prices

Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating costs. Historically, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. However, inflation rose sharply at the end of 2021 and ~~has~~ continued to rise ~~through the first nine months of~~in 2023 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated ~~throughout the remainder of 2023.~~during 2024. Furthermore, a prolonged period of inflation could cause our costs, including compensation, occupancy and software costs, to increase, which could adversely affect our results of operations and financial condition.

While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.

Critical Accounting Estimates

We have identified certain accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our accounting policies are more fully described in Note 1 to the consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. The critical accounting estimates, as summarized below, which we believe to be the most critical in preparing our consolidated financial statements relate to allowance for credit losses, mortgage servicing rights asset, goodwill and identifiable intangible assets, mortgage loan indemnification liability and acquisition accounting. Since December 31, ~~2022,~~2023, there have been no changes in critical accounting estimates as further described under “Critical Accounting Estimates” in our ~~2022~~2023 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our assessment of market risk as of ~~September 30, 2023~~March 31, 2024 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our ~~2022~~2023 Form 10-K, except as discussed below.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

Banking Segment

The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent

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that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities. To help mitigate net interest income spread compression between our assets and liabilities as the Federal Reserve increases interest rates, management continues to execute certain derivative trades, as either cash flow hedges or fair value hedges, that benefit the banking segment as interest rates rise. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely.

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As illustrated in the table below, the banking segment is currently asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).


	September 30, 2023																	March 31, 2024
	3 Months or			> 3 Months to			> 1 Year to			> 3 Years to								3 Months or			> 3 Months to			> 1 Year to			> 3 Years to
	Less			1 Year			3 Years			5 Years			> 5 Years			Total		Less			1 Year			3 Years			5 Years			> 5 Years			Total
Interest sensitive assets:
Loans	$	4,296,266		$	1,263,744		$	1,856,072		$	786,047		$	628,718		$	8,830,847	$	4,079,513		$	1,407,964		$	1,805,243		$	697,883		$	547,259		$	8,537,862
Securities		546,334			191,735			422,277			324,445			1,019,418			2,504,209		510,369			215,805			413,366			324,916			976,249			2,440,705
Federal funds sold and securities purchased under agreements to resell		1,430,032			—			—			—			—			1,430,032		1,605,930			—			—			—			—			1,605,930
Other interest sensitive assets		7,711			—			—			—			29,683			37,394		8,202			—			—			—			29,732			37,934
Total interest sensitive assets		6,280,343			1,455,479			2,278,349			1,110,492			1,677,819			12,802,482		6,204,014			1,623,769			2,218,609			1,022,799			1,553,240			12,622,431

Interest sensitive liabilities:
Interest bearing checking	$	6,356,466		$	—		$	—		$	—		$	—		$	6,356,466	$	6,293,800		$	—		$	—		$	—		$	—		$	6,293,800
Savings		264,111			—			—			—			—			264,111		255,223			—			—			—			—			255,223
Time deposits		166,454			899,518			99,365			11,394			18			1,176,749		441,218			633,525			67,025			51,781			—			1,193,549
Notes payable and other borrowings		448,014			102			333			444			1,865			450,758		442,935			80			265			361			1,589			445,230
Total interest sensitive liabilities		7,235,045			899,620			99,698			11,838			1,883			8,248,084		7,433,176			633,605			67,290			52,142			1,589			8,187,802

Interest sensitivity gap	$	(954,702)		$	555,859		$	2,178,651		$	1,098,654		$	1,675,936		$	4,554,398	$	(1,229,162)		$	990,164		$	2,151,319		$	970,657		$	1,551,651		$	4,434,629

Cumulative interest sensitivity gap	$	(954,702)		$	(398,843)		$	1,779,808		$	2,878,462		$	4,554,398				$	(1,229,162)		$	(238,998)		$	1,912,321		$	2,882,978		$	4,434,629

Percentage of cumulative gap to total interest sensitive assets		(7.46)	%		(3.12)	%		13.90	%		22.48	%		35.57	%				(9.74)	%		(1.89)	%		15.15	%		22.84	%		35.13	%

The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 50 to 100 basis points to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on economic value of equity by discounting projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance sheet derivatives.

The table below shows the estimated impact of a range of changes in interest rates on net interest income and on economic value of equity for the banking segment at ~~September 30, 2023~~March 31, 2024 (dollars in thousands).


Change in	Changes in				Changes in				Changes in				Changes in
Interest Rates	Net Interest Income				Economic Value of Equity				Net Interest Income				Economic Value of Equity
(basis points)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
+200	$	33,557	7.94	%	$	132,814	7.57	%	$	38,647	9.39	%	$	190,042	11.77	%
+100	$	18,112	4.29	%	$	87,372	4.98	%	$	20,780	5.05	%	$	116,837	7.23	%
-50	$	(9,324)	(2.21)	%	$	(68,790)	(3.92)	%	$	(10,666)	(2.59)	%	$	(84,482)	(5.23)	%
-100	$	(18,978)	(4.49)	%	$	(144,705)	(8.24)	%	$	(21,660)	(5.26)	%	$	(181,143)	(11.22)	%
-200	$	(40,830)	(9.66)	%	$	(336,915)	(19.19)	%	$	(44,876)	(10.90)	%	$	(399,065)	(24.71)	%

The projected changes in ~~net interest income and economic value of equity to changes in interest rates at September 30, 2023~~the table above were in compliance with established internal policy ~~guidelines.~~guidelines, with the exception of the estimated change in economic value of equity impact based on a -200 basis points change in interest rates which marginally exceeded management’s internal policy limit. These projected changes are based on numerous ~~assumptions~~assumptions. Upon implementation of ~~growth and changes~~pending assumption updates based on the expected transition into the next interest rate cycle, management anticipates that over time the estimated change in ~~the mix~~economic value of ~~assets or liabilities. The~~equity impact will return to compliance with established internal policy limit. Furthermore, the projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of the Bank’s sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates and any runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above. Given projected impacts on net interest income associated with the expected transition into the next phase of

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the interest rate cycle, we continue to evaluate our current GAP position, which may result in a repositioning of the banking segment towards a more neutral or liability sensitive balance sheet.

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Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate loans remain at applicable rate floors, which may delay and/or limit changes in interest income during a period of changing rates. If interest rates were to fall, the impact on our interest income would be limited by these rate floors. In addition, declining interest rates may negatively affect our cost of funds on deposits. The extent of this impact will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of management strategies. If interest rates were to rise, yields on the portion of our portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.

Broker-Dealer Segment

Our broker-dealer segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, use of derivatives and securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.

Our broker-dealer segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest-earning assets including customer and correspondent margin loans and receivables and securities borrowing activities. Our funding sources, which include customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities, also expose the broker-dealer to interest rate risk. Movement in short-term interest rates could reduce the positive spread between the broker-dealer segment’s interest income and interest expense.

With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans and receivables are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.

The following table categorizes the broker-dealer segment’s net trading securities which are subject to interest rate and market price risk (dollars in thousands).


	September 30, 2023															March 31, 2024
	1 Year			> 1 Year			> 5 Years									1 Year			> 1 Year			> 5 Years
	or Less			to 5 Years			to 10 Years			> 10 Years			Total			or Less			to 5 Years			to 10 Years			> 10 Years			Total
Trading securities, at fair value
Municipal obligations	$	91		$	25,056		$	45,301		$	113,108		$	183,556		$	3,012		$	38,392		$	67,501		$	151,778		$	260,683
U.S. government and government agency obligations		18,789			(6,678)			(6,490)			263,475			269,096			5,095			(5,958)			(19,941)			238,871			218,067
Corporate obligations		16,756			25,092			17,512			5,904			65,264			6,883			26,798			43,052			31,291			108,024
Total debt securities		35,636			43,470			56,323			382,487			517,916			14,990			59,232			90,612			421,940			586,774
Corporate equity securities		20			—			—			—			20			—			—			—			—			—
Other		9,366			—			—			—			9,366			10,301			—			—			—			10,301
	$	45,022		$	43,470		$	56,323		$	382,487		$	527,302		$	25,291		$	59,232		$	90,612		$	421,940		$	597,075

Weighted average yield
Municipal obligations		0.13	%		4.25	%		3.68	%		4.40	%		4.22	%		0.24	%		2.18	%		3.18	%		3.46	%		3.23	%
U.S. government and government agency obligations		5.07	%		2.83	%		3.31	%		5.97	%		5.53	%		4.30	%		4.53	%		1.96	%		4.77	%		4.39	%
Corporate obligations		4.31	%		5.17	%		4.79	%		3.80	%		4.61	%		5.67	%		5.90	%		5.65	%		4.09	%		5.35	%

Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.

Our broker-dealer segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.

Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.

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Mortgage Origination Segment

Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also materially and adversely affect our volume of mortgage loan originations.

IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments to sell MBSs to minimize the impact on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.

We have expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage origination segment. As a result of our mortgage servicing business, we have a portfolio of retained MSR. One of the principal risks associated with MSR is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, futures contracts and forward MBS commitments, as a means to mitigate market risk associated with MSR assets. No hedging strategy can protect us completely, and hedging strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually increase our risks and losses. The ~~increasing size of our~~ MSR portfolio ~~may increase our~~exposes us to interest rate risk and, correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR.

The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept.

Consolidated

At ~~September 30, 2023,~~March 31, 2024, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and unamortized debt issuance costs and premiums, were $350 million, and was all subject to fixed interest rates. If interest rates were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future consolidated earnings or cash flows.

As noted above within the discussion for each business segment, on a consolidated basis, our primary component of market risk is sensitivity to changes in interest rates. Consequently, and in large part due to the significance of our banking segment, our consolidated earnings depend to a significant extent on our net interest income. Refer to the discussion in the “Banking Segment” section above that provides more details regarding sources of interest rate risk and asset/liability management policies and procedures employed to manage our interest-earning assets and interest-bearing liabilities, and potential future repositioning of our GAP position, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk.

Table of Contents

The table below shows the estimated impact of a range of changes in interest rates on net interest income on a consolidated basis at ~~September 30, 2023~~March 31, 2024 (dollars in thousands).


Change in	Changes in				Changes in
Interest Rates	Net Interest Income				Net Interest Income
(basis points)	Amount		Percent		Amount		Percent
+200	$	50,556	10.26	%	$	51,379	11.38	%
+100	$	26,577	5.39	%	$	27,118	6.01	%
-50	$	(13,474)	(2.73)	%	$	(13,712)	(3.04)	%
-100	$	(27,246)	(5.53)	%	$	(27,734)	(6.14)	%
-200	$	(57,333)	(11.63)	%	$	(56,999)	(12.63)	%

~~Table of Contents~~

The projected changes in ~~net interest income to changes in interest rates at September 30, 2023~~the table above were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. The projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of our asset sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates including runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the ~~third~~first fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, except that we implemented an enterprise human capital management system replacement.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 13 to our Consolidated Financial Statements, which is incorporated by reference herein.

Item 1A. Risk Factors.

~~The following risk factor represents a~~There have been no material ~~change~~changes to the risk factors disclosed under “Item 1A. Risk Factors” of our ~~2022~~2023 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our ~~2022~~2023 Form 10-K.

~~Adverse developments affecting the financial services industry, such as bank failures or concerns involving liquidity, may have a material effect on the Company’s operations.~~

Events in early 2023 relating to the failures of certain banking entities have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions as well as caused the stock prices of many financial institutions to become volatile. In the future, events such as these bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to these failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve Bank announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. However, it is uncertain whether these steps by the government will be sufficient to reduce the risk of additional bank failures in the future or resultant significant depositor withdrawals at other institutions. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Our operational systems and networks have been, and will continue to be, subject to an increasing risk of continually evolving cybersecurity or other technological risks, which could result in a loss of customer business, financial liability, regulatory penalties, damage to our reputation or the disclosure of confidential information.

We rely heavily on communications and information systems to conduct our business and maintain the security of confidential information and complex transactions, which subjects us to an increasing risk of cyber incidents from these activities due to a combination of new technologies and the increasing use of the Internet to conduct financial transactions, as well as a potential failure, interruption or breach in the security of these systems, including those that could result from attacks or planned changes, upgrades and maintenance of these systems. Such cyber incidents could result in failures or disruptions in our customer relationship management, securities trading, general ledger, deposits, computer systems, electronic underwriting servicing or loan origination systems; or unauthorized disclosure of confidential and non-public information maintained within our systems. We also utilize relationships with third parties to aid in a significant portion of our information systems, communications, data management and transaction processing. These third parties with which we do business may also be sources of cybersecurity or other technological risks, including operational errors, system interruptions or breaches, unauthorized disclosure of confidential information and misuse of intellectual property, and have experienced cyber attacks. If our third-party service providers encounter any of these issues, we could be exposed to disruption of service, reputation damages, and litigation risk, any of which could have a material adverse effect on our business.

~~Table of Contents~~

On June 27, 2023, a third-party vendor of the Bank confirmed that data specific to the Bank’s customers was likely obtained in a security incident targeting the vendor’s instance of the MOVEit Transfer Application (the “Vendor Incident”). As a result of this Vendor Incident, an unauthorized party likely obtained information in the vendor’s possession about substantially all of the Bank’s customers, including social security numbers and account numbers. On July 11, 2023, Hilltop Securities was notified by the same vendor that certain of its data also was likely obtained in the Vendor Incident; however, based on the review conducted to date, we do not have indication that protected or confidential information was present within the information obtained related to Hilltop Securities. Given the widespread use of the MOVEit Transfer Application, additional vendors of ours may have been impacted. We are in the process of evaluating the full scope of the costs and impact of the Vendor Incident, however we do not expect the costs to have a material impact to the Company’s future consolidated financial statements. We have incurred, and may continue to incur, expenses related to this incident, and we remain subject to risks and uncertainties as a result of the incident, including litigation and additional regulatory scrutiny.

The continued occurrence of cybersecurity incidents across a range of industries has resulted in increased legislative and regulatory scrutiny over cybersecurity and calls for additional data privacy laws and regulations at both the state and federal levels. For example, in 2018, the State of California adopted the California Consumer Privacy Act of 2018, which imposes requirements on companies operating in California and provides consumers with a private right of action if covered companies suffer a data breach related to their failure to implement reasonable security measures. These laws and regulations could result in increased operating expenses or increase our exposure to the risk of litigation or regulatory inquiries or proceedings.

Although we devote significant resources to maintain and regularly upgrade our systems and networks to safeguard critical business applications, there is no guarantee that these measures or any other measures can provide absolute security. Our computer systems, software and networks may be adversely affected by cyber incidents such as unauthorized access; loss or destruction of data (including confidential client information); account takeovers; unavailability of service; computer viruses or other malicious code; cyber attacks; and other events. In addition, our protective measures may not promptly detect intrusions, and we may experience losses or incur costs or other damage related to intrusions that go undetected or go undetected for significant periods of time, at levels that adversely affect our financial results or reputation. Further, because the methods used to cause cyber attacks change frequently, or in some cases cannot be recognized until launched, we may be unable to implement preventative measures or proactively address these methods until they are discovered. Cyber threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. For example, during the second quarter of 2018, we became the victim of a “spear phishing” attack on one of our employees in which we suffered a $4.0 million wire fraud loss and sensitive customer information was stolen. As a result of this attack, we incurred costs to provide identity protection services, including credit monitoring, to customers who may have been impacted and other legal and professional services, and may also incur expenses in the future including legal and professional expenses and claims for damages. Additional challenges are posed by external extremist parties, including foreign state actors, in some circumstances, as a means to promote political ends. If one or more of these events occurs, it could result in the disclosure of confidential client or customer information, damage to our reputation with our clients, customers and the market, customer dissatisfaction, additional costs such as repairing systems or adding new personnel or protection technologies, regulatory penalties, fines, remediation costs, exposure to litigation and other financial losses to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems.

We continue to evaluate our cybersecurity program and will consider incorporating new practices as necessary to meet the expectations of regulatory agencies in light of such cybersecurity guidance and regulatory actions and settlements for cybersecurity-related failures and violations by other industry participants. Such procedures include management-level engagement and corporate governance, risk management and assessment, technical controls, incident response planning, vulnerability testing, vendor management, intrusion detection monitoring, patch management and staff training. Even with these procedures, we cannot assure you that we will be fully protected from a cybersecurity incident, the occurrence of which could adversely affect our reputation and financial condition.

~~Table of Contents~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table details our repurchases of shares of common stock during the three months ended ~~September 30, 2023.~~March 31, 2024.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1 - July 31, 2023	—	$	—	—	$	70,501,138
August 1 - August 31, 2023	—		—	—		70,501,138
September 1 - September 30, 2023	—		—	—		70,501,138
January 1 - January 31, 2024							—	$	—	—	$	75,000,000
February 1 - February 29, 2024							140,042		30.84	140,042		70,681,284
March 1 - March 31, 2024							180,000		31.19	180,000		65,067,201
Total	—	$	—	—			320,042	$	31.04	320,042

(1)

Item 5. Other Information

Pursuant to Item 408(a) of Regulation S-K, none of our directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended ~~September 30, 2023.~~March 31, 2024.

Table of Contents

Item 6. Exhibits.


Exhibit Number		Description of Exhibit

31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HILLTOP HOLDINGS INC.

Date: ~~October 23, 2023~~April 22, 2024	By:	/s/ William B. Furr
		William B. Furr
		Chief Financial Officer (Principal Financial Officer and duly authorized officer)

9590


			Range (Weighted-Average)
Financial instrument	Valuation Technique	Unobservable Inputs	September 30, 2023							December 31, 2022
Available for sale securities	Discounted cash flow	Discount rate				15.00		%						—

Loans held for sale	Market comparable	Projected price	78	-	89	%	(	87	%)	88	-	95	%	(	89	%)

Loans held for investment	Discounted cash flow	Discount rate				11.50		%					11.88		%

MSR asset	Discounted cash flow	Constant prepayment rate				7.30		%					8.14		%
		Discount rate				11.70		%					12.10		%


	Amortized Cost Basis by Origination Year														Loans
												2018 and			Converted to
September 30, 2023	2023		2022		2021		2020		2019			Prior	Revolving		Term Loans		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	3,163	$	31,616	$	32,778	$	17,913	$	7,735	$	5,594	$	(26)	$	189	$	98,962
Internal Grade 4-7 (Pass normal risk)		129,170		286,269		370,985		118,082		69,726		48,999		34,867		16,725		1,074,823
Internal Grade 8-11 (Pass high risk and watch)		107,113		176,060		102,960		92,100		55,752		77,102		13,320		814		625,221
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		40,821		11,736		14,108		2,553		6,812		752		—		—		76,782
Internal Grade 14 (Substandard non-accrual)		382		1,414		—		—		—		579		—		—		2,375
Current period gross charge-offs		—		—		—		—		—		34		��		—		34

Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	37,769	$	30,817	$	105,834	$	41,817	$	17,690	$	45,379	$	2,238	$	14,321	$	295,865
Internal Grade 4-7 (Pass normal risk)		93,484		172,896		148,564		71,022		63,119		123,573		16,538		—		689,196
Internal Grade 8-11 (Pass high risk and watch)		47,496		79,546		72,988		89,217		19,041		66,033		5,149		1,505		380,975
Internal Grade 12 (Special mention)		—		—		—		—		1,024		—		—		—		1,024
Internal Grade 13 (Substandard accrual)		2,546		3,384		5,166		7,548		5,656		11,314		98		—		35,712
Internal Grade 14 (Substandard non-accrual)		12		4,053		655		—		—		244		—		—		4,964
Current period gross charge-offs		—		—		—		—		—		977		—		—		977

Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	19,309	$	30,115	$	30,538	$	15,463	$	20,118	$	1,857	$	28,897	$	17	$	146,314
Internal Grade 4-7 (Pass normal risk)		58,360		80,794		135,009		25,721		4,521		10,508		279,576		21,522		616,011
Internal Grade 8-11 (Pass high risk and watch)		85,308		127,147		39,601		38,824		7,464		8,063		234,197		2,688		543,292
Internal Grade 12 (Special mention)		—		—		132		—		—		—		33,841		—		33,973
Internal Grade 13 (Substandard accrual)		4,106		1,453		4,066		3,992		3,806		370		24,681		22,691		65,165
Internal Grade 14 (Substandard non-accrual)		69		370		147		1,917		—		3,776		—		3,911		10,190
Current period gross charge-offs		276		3,041		87		—		25		586		—		—		4,015

Construction and land development
Internal Grade 1-3 (Pass low risk)	$	5,322	$	15,201	$	12,927	$	—	$	812	$	341	$	—	$	—	$	34,603
Internal Grade 4-7 (Pass normal risk)		213,083		255,710		98,331		28,393		868		1,786		27,943		—		626,114
Internal Grade 8-11 (Pass high risk and watch)		141,367		163,554		46,959		4,073		2,370		232		1,436		9,486		369,477
Internal Grade 12 (Special mention)		—		—		373		—		—		—		—		—		373
Internal Grade 13 (Substandard accrual)		14,613		3,788		—		11,247		—		—		—		2,393		32,041
Internal Grade 14 (Substandard non-accrual)		277		285		—		—		—		—		—		—		562
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		2,750		867		—		—		—		919		—		—		4,536
FICO greater than 720		17,035		3,432		121		51		—		—		—		—		20,639
Substandard non-accrual		—		—		—		—		—		—		—		—		—
Other ⁽¹⁾		356		—		—		—		—		—		—		—		356
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

1-4 family residential
FICO less than 620	$	—	$	1,457	$	646	$	756	$	255	$	23,792	$	237	$	—	$	27,143
FICO between 620 and 720		3,333		16,876		12,627		6,739		4,837		25,693		1,714		—		71,819
FICO greater than 720		136,432		546,544		742,656		90,218		38,609		55,815		3,547		630		1,614,451
Substandard non-accrual		—		534		—		—		—		8,937		—		—		9,471
Other ⁽¹⁾		20,233		21,387		12,008		1,385		2,238		3,122		2		—		60,375
Current period gross charge-offs		—		—		—		—		—		73		—		—		73